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Inter-industry trade and business cycle dynamics


  • Lechthaler, Wolfgang
  • Mileva, Mariya


Motivated by the increased importance of trade between industrialized and less-developed countries, we build a DSGE model featuring comparative advantage and inter-industry trade to analyze business cycle dynamics of industrialized countries. We show that productivity shocks lead to shifts in the relative demand of exporting and import-competing sectors, implying an important role for the mobility of workers across sectors. If workers are very mobile, then the aggregate implications of the two-sector model are similar to a one-sector model. If workers are very immobile, then the two-sector model features smaller responses in GDP to domestic shocks but larger responses to foreign shocks, implying larger comovement of GDP across countries.

Suggested Citation

  • Lechthaler, Wolfgang & Mileva, Mariya, 2016. "Inter-industry trade and business cycle dynamics," Kiel Working Papers 2041, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:2041

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    References listed on IDEAS

    1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    2. 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.
    3. Lechthaler, Wolfgang & Mileva, Mariya, 2013. "Trade liberalization and wage inequality: New insights from a dynamic trade model with heterogeneous firms and comparative advantage," Kiel Working Papers 1886, Kiel Institute for the World Economy (IfW).
    4. Matteo Cacciatore, 2013. "Trade, Unemployment, and Monetary Policy," 2013 Meeting Papers 724, Society for Economic Dynamics.
    5. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
    6. repec:bof:bofitp:urn:nbn:fi:bof-201503111109 is not listed on IDEAS
    7. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October.
    8. Wolfgang Lechthaler & Mariya Mileva, 2014. "Smoothing the adjustment to trade liberalization," WWWforEurope Working Papers series 61, WWWforEurope.
    9. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    10. Fidrmuc, Jarko & Korhonen, Iikka, 2015. "Meta-analysis of Chinese business cycle correlation," BOFIT Discussion Papers 6/2015, Bank of Finland, Institute for Economies in Transition.
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    More about this item


    international business cycles; inter-industry trade; comparative advantage; wage inequality;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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