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Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements

  • Alan C. Stockman
  • Linda L. Tesar

This paper studies the international transmission of business cycles by developing a two-country real business-cycle model and confronting it with a broad set of empirical observations. These observations include variances and covariances of output, labor, consumption, employment, and investment in traded and nontraded sectors of the economy, cross-country correlations of output and consumption, and correlations between quantities and relative prices. We find that technology shocks as measured by observed total factor productivity (by sector) must be supplemented by other sources of disturbances to explain certain features of the data. We call these other disturbances taste shocks, though they may stand in for some other shocks. In particular, it is difficult to explain the observed comovements of the relative price of nontraded to traded goods with the relative consumption of those goods without invoking something like taste shocks. Our model is roughly consistent with a broad set of observations, though puzzles emerge regarding the correlation of nontraded-sector output with its relative price and the variance of the balance of trade.

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File URL: http://www.nber.org/papers/w3566.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3566.

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Date of creation: Dec 1990
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Publication status: published as American Economic Review, vol 85, no. 1, pp. 168-185, (March 1995)
Handle: RePEc:nbr:nberwo:3566
Note: ITI IFM
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  1. Kravis, Irving B & Heston, Alan W & Summers, Robert, 1978. "Real GDP per Capita for More Than One Hundred Countries," Economic Journal, Royal Economic Society, vol. 88(350), pages 215-42, June.
  2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  3. F. J.M. Meyer-zu-Schlochtern, 1988. "An International Sectoral Data Base for Thirteen OECD Countries," OECD Economics Department Working Papers 57, OECD Publishing.
  4. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
  5. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers 224, University of Rochester - Center for Economic Research (RCER).
  6. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1990. "Homework In Macroeconomics I: Basic Theory," Working Papers 90-17, C.V. Starr Center for Applied Economics, New York University.
  7. Dellas, Harris, 1986. "A real model of the world business cycle," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 381-394, September.
  8. Irving B. Kravis & Robert E. Lipsey, 1986. "The Assessment of National Price Levels," NBER Working Papers 1912, National Bureau of Economic Research, Inc.
  9. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 122, UCLA Department of Economics.
  10. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  11. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  12. Ahmed, S. & Ickes, B. & Wang, P. & Yoo, S., 1989. "International Business Cycles," Papers 7-89-4, Pennsylvania State - Department of Economics.
  13. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  14. Heston, Alan & Summers, Robert, 1988. "What We Have Learned about Prices and Quantities from International Comparisons: 1987," American Economic Review, American Economic Association, vol. 78(2), pages 467-73, May.
  15. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  16. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  17. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  18. Irving B. Kravis & Robert E. Lipsey, 1990. "The International Comparison Program: Current Status and Problems," NBER Working Papers 3304, National Bureau of Economic Research, Inc.
  19. John Kennan, 1988. "Equilibrium Interpretations of Employment and Real Wage Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 157-216 National Bureau of Economic Research, Inc.
  20. Gerlach, H M Stefan, 1988. "World Business Cycles under Fixed and Flexible Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 621-32, November.
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