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International Comovement through Endogenous Long Run Risk

Author

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  • Ana Maria Santacreu

    (INSEAD)

  • Federico Gavazzoni

    (INSEAD)

Abstract

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.

Suggested Citation

  • Ana Maria Santacreu & Federico Gavazzoni, 2014. "International Comovement through Endogenous Long Run Risk," 2014 Meeting Papers 993, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:993
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    References listed on IDEAS

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    1. Christian Broda & Joshua Greenfield & David Weinstein, 2006. "From Groundnuts to Globalization: A Structural Estimate of Trade and Growth," NBER Working Papers 12512, National Bureau of Economic Research, Inc.
    2. Ravi Bansal & Dana Kiku & Amir Yaron, 2012. "Risks For the Long Run: Estimation with Time Aggregation," NBER Working Papers 18305, National Bureau of Economic Research, Inc.
    3. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
    4. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 671-698, May.
    5. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    6. Santacreu, Ana Maria, 2015. "Innovation, diffusion, and trade: Theory and measurement," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 1-20.
    7. Diego Comin & Mark Gertler, 2006. "Medium-Term Business Cycles," American Economic Review, American Economic Association, vol. 96(3), pages 523-551, June.
    8. Riccardo Colacito & Mariano M. Croce, 2013. "International Asset Pricing with Recursive Preferences," Journal of Finance, American Finance Association, vol. 68(6), pages 2651-2686, December.
    9. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    10. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    11. Riccardo Colacito & Mariano M. Croce, 2011. "Risks for the Long Run and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 153-181.
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