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"Essays on International Business Cycles", PhD thesis, Economics Department, University of Chicago, 1991

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  • Kollmann, Robert

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PhD dissertation, 1991, Economics Department, University of Chicago. (Thesis committee: Michael Woodford, advisor; José Scheinkman; John Huizinga.) Models of the international economy which assume complete asset markets predict that consumption co-moves closely in different countries as this structure of asset markets allows agents in different countries to 'pool' the country-specific risks which they face (see Scheinkman (1984), Leme (1984)). Examples in this class of models include the recent international Real Business Cycle models of, among others, Backus, Kehoe & Kydland (1989), Baxter & Crucini (1989), Stockman & Tesar (1991). The first essay in this thesis (chapter II) tests the implications for the trend behavior of consumption of models of the international economy which assume complete asset markets. In a world where consumptions and real bilateral real exchange rates of different countries follow unit root processes, such models predict that (under certain assumptions about preferences) consumptions and bilateral real exchange rates are cointegrated for any given pair of countries. The paper presents statistical tests which suggest that data on consumptions and real exchange rates for the US, Japan, France, Britain, Italy and Canada during the period 1971-1987 are inconsistent with this prediction. These findings suggest that models with limitations on international asset markets might be needed to explain the international covariation of consumption. The second essay in this thesis (chapter III) presents a Real Business Cycle model in which limitations on international capital markets exist in the sense that only debt contracts are available for international capital flows. Simulations of the model suggest that it can explain the low cross-country correlations observed in detrended consumption data, and that for 'realistic' cross-country correlations of the exogenous shocks. The second essay argues also that a model which allows for additive technology shocks is better able to explain the observed positive correlations of investment and output across countries than standard business cycle theories in which multiplicative shocks to total factor productivity are the only source of economic fluctuations. One possible interpretation of the additive shocks is as shocks to government consumption. The dissertation (pp.12-13) shows (inter alia) that efficient international risk sharing countries requires that ratios of Home and Foreign marginal utilities of aggregate consumption are proportional to the relative price of Home vs. Foreign consumption: U’(C)/U’(C*)=kP/P*, with C,C*: aggregate consumption of Home and Foreign households, respectively; P,P*: Home and Foreign consumption prices indices (expressed in a common currency); U’ is the marginal utility of consumption, and k>0 is a date-and-time invariant coefficient (that reflects countries’ relative wealth). With constant relative risk aversion (identical for both countries), this implies: - s log(C/C*)=log(P/P*), where s>0 is the coefficient of relative risk aversion. Thus, in an efficient world, relative Home vs. Foreign consumption would be closely linked to the (CPI-based) real exchange rate; a country whose real exchange rate depreciates would experience faster consumption growth than the rest of the world. The dissertation shows that this prediction is strongly rejected by the data (pp. 22-27). My 1995 Journal of International Money and Finance paper (see above) is based on these results. Two years after my dissertation, David Backus and Gregor Smith (Journal of International Economics, 1993) published a paper that derives the same risk sharing condition; these authors likewise conclude that this condition is rejected empirically. The literature sometimes refers to the risk sharing condition as the 'Backus-Smith condition', and describes the empirical failure of that condition as the 'Backus-Smith puzzle'. My dissertation independently--and earlier--derived that condition, and it provided empirical tests that are complementary to those of Backus and Smith.

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  • Kollmann, Robert, 1991. ""Essays on International Business Cycles", PhD thesis, Economics Department, University of Chicago, 1991," MPRA Paper 69905, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:69905
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    References listed on IDEAS

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    23. 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.
    24. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    25. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-193, January.
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    Citations

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    Cited by:

    1. Dellas, Harris & Tavlas, George S., 2009. "An optimum-currency-area odyssey," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1117-1137, November.
    2. Kollmann, Robert, 1998. "US trade balance dynamics: the role of fiscal policy and productivity shocks and of financial market linkages," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 637-669, August.
    3. Robert Kollmann, 2013. "Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 159-195, December.
    4. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(2), pages 239-262, April.
    5. Robert Kollmann, 2015. "Risk sharing in a world economy with uncertainty shocks," Globalization Institute Working Papers 258, Federal Reserve Bank of Dallas, revised 01 Nov 2015.
    6. Robert Kollmann, 2015. "Exchange Rates Dynamics with Long-Run Risk and Recursive Preferences," Open Economies Review, Springer, vol. 26(2), pages 175-196, April.
    7. Colacito, Riccardo & Croce, Mariano Massimiliano & Liu, Yang & Shaliastovich, Ivan, 2018. "Volatility Risk Pass-Through," CEPR Discussion Papers 13325, C.E.P.R. Discussion Papers.
    8. Robert Kollmann, 2019. "Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel," Open Economies Review, Springer, vol. 30(1), pages 65-85, February.
    9. Robert Kollmann, 2015. "Exchange Rate and Current Account Dynamics: the Role of Asset Market Structure, Long-Run Risk and Risk Appetite," 2015 Meeting Papers 1397, Society for Economic Dynamics.
    10. Robert Kollmann, 2012. "Limited asset market participation and the consumption-real exchange rate anomaly," Canadian Journal of Economics, Canadian Economics Association, vol. 45(2), pages 566-584, May.
    11. Coeurdacier, Nicolas & Kollmann, Robert & Martin, Philippe, 2010. "International portfolios, capital accumulation and foreign assets dynamics," Journal of International Economics, Elsevier, vol. 80(1), pages 100-112, January.
    12. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2009. "International Portfolios with Supply, Demand and Redistributive Shocks," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 231-263, National Bureau of Economic Research, Inc.
    13. Kollman, R., 1996. "The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Cahiers de recherche 9614, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    14. Robert Kollmann, 2010. "Government Purchases and the Real Exchange Rate," Open Economies Review, Springer, vol. 21(1), pages 49-64, February.
    15. Kollmann, Robert, 2016. "International business cycles and risk sharing with uncertainty shocks and recursive preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 115-124.
    16. Robert Kollmann, 2016. "Risk Sharing, the Exchange Rate and Net Foreign Assets in a World Economy with Uncertainty Shocks," 2016 Meeting Papers 721, Society for Economic Dynamics.
    17. Nicolas Coeurdacier, 2011. "Limited participation and International Risk-Sharing," 2011 Meeting Papers 613, Society for Economic Dynamics.
    18. Robert Kollmann & Nicolas Coeurdacier & Philippe Martin, 2008. "International portfolios, current account dynamics and capital accumulation," ULB Institutional Repository 2013/13410, ULB -- Universite Libre de Bruxelles.
    19. Robert Kollmann, 2017. "Explaining International Business Cycle Synchronization," 2017 Meeting Papers 1489, Society for Economic Dynamics.
    20. Kyunghun Kim & Ju Hyun Pyun & Jiyoun An, 2017. "Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis?," 2017 Meeting Papers 1236, Society for Economic Dynamics.
    21. Kollmann, Robert, 1999. "Effects of Government Purchases in Open Economies: Empirical Evidence and Predictions of a Dynamic General Equilibrium Model With Nominal Rigidities," MPRA Paper 70342, University Library of Munich, Germany.
    22. Nicolas Coeurdacier & Robert Kollmann & Philippe Martin, 2007. "Return Volatility and International Portfolio Choice," 2007 Meeting Papers 474, Society for Economic Dynamics.
    23. Kenneth S. Lin, 1996. "Private Consumption, Nontraded Goods and Real Exchange Rate: A Cointegration_Euler Equation Approach," NBER Working Papers 5731, National Bureau of Economic Research, Inc.
    24. Kollmann, Robert, 2009. "Domestic Financial Frictions: Implications for International Risk Sharing, Real Exchange Rate Volatility and International Business Cycles," MPRA Paper 70348, University Library of Munich, Germany.
    25. Ryan Banerjee & Nicoletta Batini, 2003. "UK Consumers’ Habits," Discussion Papers 13, Monetary Policy Committee Unit, Bank of England.

    More about this item

    Keywords

    international business cycles; risk sharing; incomplete financial markets correlation between relative consumption and the real exchange rate; international real business cycles;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization
    • G1 - Financial Economics - - General Financial Markets

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