American Economic Review Vol. 85 No. 1 1995
Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements
Abstract
Trade on international financial markets allows people to insure country-specific risk and smooth consumption intertemporally. Equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near 1 and excessive volatility of investment. We incorporate nontraded goods in the model and find that the implications for aggregate consumption, investment, and the trade balance are consistent with business-cycle properties of industrialized countries. However, the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level. Taste shocks produce price--quantity relationships more consistent with the data.
- Volume
- 85
- Issue
- 1
- Pages
- 168-185
- Sources
- bibtex:phds-export.bib