IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/69905.html
   My bibliography  Save this paper

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

Author

Listed:
  • Kollmann, Robert

Abstract

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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/69905/1/MPRA_paper_69905.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
    5. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
    6. Neusser, Klaus, 1991. "Testing the long-run implications of the neoclassical growth model," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 3-37, February.
    7. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    8. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-1311, July.
    9. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
    10. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-956, October.
    11. Jeremy Greenwood & R. Preston McAfee, 1991. "Externalities and Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 103-121.
    12. Conze, Antoine & Lasry, Jean Michel & Scheinkman, Jose, 1993. "2. Borrowing Constraints and International Comovements," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 34(Special I), pages 23-47, December.
    13. Cumby, Robert E. & Huizinga, John & Obstfeld, Maurice, 1983. "Two-step two-stage least squares estimation in models with rational expectations," Journal of Econometrics, Elsevier, vol. 21(3), pages 333-355, April.
    14. Fisher, Eric O'N & Park, Joon Y, 1991. "Testing Purchasing Power Parity under the Null Hypothesis of Co-integration," Economic Journal, Royal Economic Society, vol. 101(409), pages 1476-1484, November.
    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. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
    17. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    18. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August.
    19. Mendoza, E.G., 1989. "Business Cycles, Adjustment Costs An The Theory Of Investment In Small Open Economy," UWO Department of Economics Working Papers 8906, University of Western Ontario, Department of Economics.
    20. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    21. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    22. repec:cdl:ucsbec:16-90 is not listed on IDEAS
    23. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-976, October.
    24. 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.
    25. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February.
    26. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederic S. Mishkin & John Simon, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(3), pages 217-229, September.
    2. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
    3. Satya P. Das & Mausumi Das & Thomas B. Fomby, 2004. "Decreasing marginal impatience, income distribution and demand for money: Theory and evidence," Discussion Papers 04-04, Indian Statistical Institute, Delhi.
    4. Engel, Charles, 2000. "Long-run PPP may not hold after all," Journal of International Economics, Elsevier, vol. 51(2), pages 243-273, August.
    5. Imad Moosa & Razzaque Bhatti, 1997. "Does speculation play any role in determining the forward exchange rate?," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 611-617.
    6. Robert Amano & Tony S. Wirjanto, "undated". "A Further Analysis of Exchange Rate Targeting in Canada," Staff Working Papers 94-2, Bank of Canada.
    7. Rapach, David E. & Weber, Christian E., 2004. "Are real interest rates really nonstationary? New evidence from tests with good size and power," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 409-430, September.
    8. Sophocles Mavroeidis, 2006. "Testing the New Keynesian Phillips Curve Without Assuming Identification," Working Papers 2006-13, Brown University, Department of Economics.
    9. Robert Amano & Tony S. Wirjanto, "undated". "The Dynamic Behaviour of Canadian Imports and the Linear-Quadratic Model: Evidence Based on the Euler Equation," Staff Working Papers 94-6, Bank of Canada.
    10. van Amano, Robert A & Norden, Simon, 1998. "Exchange Rates and Oil Prices," Review of International Economics, Wiley Blackwell, vol. 6(4), pages 683-694, November.
    11. Iris Claus, 1997. "A Measure of Underlying Inflation in the United States," Staff Working Papers 97-20, Bank of Canada.
    12. Pat Wilson & John Okunev & Guy Ta, 1994. "Are Real Estate and Securities Markets Integrated? Some Australian Evidence," Working Paper Series 42, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    13. David De La Croix & Jean-Pierre Urbain, 1998. "Intertemporal substitution in import demand and habit formation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(6), pages 589-612.
    14. Heinesen, Eskil, 1995. "A macroeconomic rationing model estimated by cointegration techniques and generalized method of moments," Economic Modelling, Elsevier, vol. 12(2), pages 97-110, April.
    15. David I. Stern & Robert K. Kaufmann, 1997. "Time series properties of global climate variables: detection and attribution of climate change," Working Papers in Ecological Economics 9702, Australian National University, Centre for Resource and Environmental Studies, Ecological Economics Program.
    16. Kwapil, Claudia & Scharler, Johann, 2010. "Interest rate pass-through, monetary policy rules and macroeconomic stability," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 236-251, March.
    17. Robert Amano & Tony S. Wirjanto, "undated". "An Empirical Investigation into Government Spending and Private Sector Behaviour," Staff Working Papers 94-8, Bank of Canada.
    18. Robert Amano, "undated". "Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand," Staff Working Papers 95-3, Bank of Canada.
    19. Robert A. Amano & Wai-Ming Ho & Tony S. Wirjanto, 1999. "Intraperiod and Intertemporal Substitution in Import Demand," Cahiers de recherche CREFE / CREFE Working Papers 84, CREFE, Université du Québec à Montréal.
    20. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.

    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;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:69905. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.