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Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles

  • Daniel Farhat


    (Department of Economics, University of Otago)

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    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.

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    Paper provided by University of Otago, Department of Economics in its series Working Papers with number 0909.

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    Length: 51 pages
    Date of creation: Sep 2009
    Date of revision: Sep 2009
    Handle: RePEc:otg:wpaper:0909
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    1. repec:oup:qjecon:v:120:y:2005:i:3:p:865-915 is not listed on IDEAS
    2. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    3. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
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    6. Guo, Jang-Ting & Sturzenegger, Federico, 1998. "Crazy Explanations of International Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 111-33, February.
    7. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    8. Riccardo Fiorito & Giulio Zanella, 2008. "Labor Supply Elasticities: Can Micro Be Misleading for Macro?," Department of Economics University of Siena 547, Department of Economics, University of Siena.
    9. Elhanan Helpman & Paul Krugman, 1987. "Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258087x, June.
    10. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
    11. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    12. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March.
    13. Allen C. Head, 2002. "Aggregate Fluctuations with National and International Returns to Scale," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1101-1125, November.
    14. Marianne Baxter & Mario J. Crucini, 1994. "Business Cycles and the Asset Structure of Foreign Trade," NBER Working Papers 4975, National Bureau of Economic Research, Inc.
    15. 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.
    16. 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.
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