International Comovement through Endogenous Long Run Risk

The international macroeconomics literature has had a hard time capturing the joint comovement of quantities and asset prises across countries. We introduce recursive preferences in an endogenous growth model of innovation and technology adoption through trade in varieties and provide an explanation of these comovements. In our model, growth is risky, and it affects current and future expected profits through its effect on the equilibrium marginal rate of substitution. We calibrate the model to data on productivity, R\&D and trade in intermediate goods and show that the comovement in quantities across countries is mainly determined by the comovement in current profits, whereas the comovement in asset prices is mainly determined by the comoevement in future expected profits across countries. With such mechanism, we can therefore reconcile a low comovement in quantities with a high comovement in asset prices.