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Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles

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  • Daniel Farhat

    () (Department of Economics, University of Otago)

Abstract

This paper examines employment dynamics and international business cycle transmission within a two-country dynamic stochastic general equilibrium model featuring an endogenously determined trade pattern. In contrast to existing literature, this model allows for the household's labor supply to be determined endogenously, producing fluctuations in employment as business cycles are transmitted from one country to another. The model is able to generate pro-cyclical domestic employment as well as positive correlations of employment and output across countries. In addition, previous studies have difficulty generating international correlations of consumption and investment. This model replicates these stylized facts by strengthening frictions in international asset markets. The structure of labor supply is shown to be vital for the transmission of business cycles through trade linkages.

Suggested Citation

  • Daniel Farhat, 2009. "Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles," Working Papers 0909, University of Otago, Department of Economics, revised Sep 2009.
  • Handle: RePEc:otg:wpaper:0909
    as

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    File URL: http://www.otago.ac.nz/economics/research/otago077124.pdf
    File Function: First version, 2009
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    References listed on IDEAS

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    4. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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    7. 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 402-417, June.
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    Cited by:

    1. Zlate, Andrei, 2016. "Offshore production and business cycle dynamics with heterogeneous firms," Journal of International Economics, Elsevier, vol. 100(C), pages 34-49.

    More about this item

    Keywords

    International Real Business Cycles; Labor Supply; Imperfect Competition; International Trade;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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