Limited asset market participation and the consumption‐real exchange rate anomaly

Abstract Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country's aggregate consumption rises relative to foreign consumption, when the country's real exchange rate depreciates. Yet empirically, relative consumption and the real exchange rate are essentially uncorrelated. This paper shows that this ‘consumption‐real exchange rate anomaly’ can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand‐to‐mouth (HTM) lives. HTM behaviour also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.     

Trade elasticity of substitution and equilibrium dynamics

The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. In simulations, the presence of multiple equilibria is shown to imply a volatile and persistent real exchange rate.     

The business cycle in a financially deregulated context: Theory and evidence

This article proposes Minsky's financial instability hypothesis (FIH) as a theoretical underpinning for a three‐regime business cycles model. Further, it is argued that the development of the FIH for open, developing economies (FIH‐ODE) provides a better understanding of the performance of business cycles in these economies, particularly during the last two decades. In support of these claims, a three‐regime autoregressive Markov switching model is estimated from 1980q1 to 2000q4 to Mexico's quarterly real GDP to investigate its business cycle behaviour. The estimated probabilities of the high and medium growth regimes suggest, for example, that after the financial liberalisation programme was fully launched, in the late 1980s, the economy shifted from the regime of medium to high growth (and vice versa) swiftly, reflecting its dependence on capital flows. Furthermore, the estimated parameters indicate that the average length of the business cycle has not changed.     

INTERNATIONAL CAPITAL FLOWS,BOOM‐BUST CYCLES,AND BUSINESS CYCLE SYNCHRONIZATION IN THE ASIA PACIFIC REGION

This article documents evidence of business cycle synchronization in selected Asia Pacific countries since the 1990s. We explain business cycle synchronization by the channel of international capital flows and boom‐bust cycles. Using the vector auto‐regression method, we find that most Asian countries experience boom‐bust cycles following capital inflows, where the boom in output is mostly driven by consumption and investment. Empirical evidence also shows that capital flow shocks are positively correlated in the region, which supports the conclusion that capital market liberalization has contributed to business cycle synchronization. (JEL F4)     

Financial globalization and real regionalization

Over the period 1972-1986, the US business cycle was strongly correlated with the business cycle in the rest of the industrialized world. Over the period 1986-2000, international co-movement was much weaker (real regionalization). At the same time, US international asset trade has increased significantly ( financial globalization). We first document these phenomena in detail and then argue that they are related. In particular, we present a model in which financial globalization occurs endogenously in response to less correlated real shocks. Financial globalization, by enhancing cross-border capital flows, further reduces the international correlations in GDP and factor supplies. We find that both less correlated shocks and the endogenous change in international financial markets are needed to quantitatively account for the observed changes in the international business cycle.     

Increasing linkages among European regions. The role of sectoral composition

This paper analyses changes in economic regional interlinkages in Europe over time and investigates the factors that could explain the dynamics of these changes. Our four main findings are the following: (i) we detect a significant surge in regional synchronisation after the Great Recession; (ii) we identify the regions most interrelated with the rest of Europe, namely, Ile de France, Inner London and Lombardia; (iii) we find that sectoral composition explains regional synchronisation in Europe, mainly after the Great Recession and (iv) we document that sectoral composition has important implications for aggregate economic fluctuations, in particular, that similarities in services-related sectors across regions explain a nonlinear relationship between sectoral composition and regional business cycle synchronisation. We also propose a new method to measure time-varying synchronisation in small samples that combines regime-switching models and dynamic model averaging.     

Noisy information,risk sharing,and international business cycles

We introduce a noisy information structure into an otherwise standard international real business cycle model with two countries. When domestic firms observe current foreign technology with some noise, predictions of the model on international correlation can be very different from those of a standard perfect information model. We show that the model can explain: (a) positive output correlation both in complete and incomplete market models, (b) consumption correlation smaller than output correlation with an introduction of information‐constrained consumers, and (c) observation of both positive and negative productivity–hours correlation in two countries.     

MONEY,CAPITAL, AND EXCHANGE RATE FLUCTUATIONS*

We explore how the informational frictions underlying monetary exchange affect international exchange rate dynamics. Our perfectly flexible price model is capable of producing endogenously rigid international relative prices in response to technology and monetary shocks. The model is capable of accounting for the empirical regularities that the real and nominal exchange rates are more volatile than U.S. output, and that the two are positively and perfectly correlated. The model is also consistent with other standard real business cycle facts for the United States.     

Financial frictions,interest rate dynamics,and international business cycle synchronization

A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.     

Sectoral shocks and business cycles: a disaggregated analysis of output fluctuations in the UK

In this paper we first show that it is possible to modify linear real business cycle models to allow for disaggregate (industry-specific) factors in the generation of macroeconomic fluctuations. We then try to determine the relative importance of aggregate and sectoral shocks by doing principal components analysis on the residuals from a VAR of output growth rates in 19 UK industrial sectors. We find that a significant percentage of the innovations in sectoral output growths can be accounted for by a single unobserved component. However, since the model only sets an upper bound to the explanatory power of aggregate impulses, the importance of using sectoral data to extract additional information to bear on the analysis of economic fluctuations is confirmed by our findings.     

International Productivity Differences,Infrastructure, and Comparative Advantage*

This paper provides an empirical analysis of the effect of infrastructure provision on industry‐level productivity and international specialization, as suggested by Clarida and Findlay’s (1992 ) model. We calculate total factor productivity (TFP) for 18 developed and developing countries and 10 manufacturing industries, and study the effects of supplies of roads, telecommunications and electric power on international variations in sectoral TFP, i.e. comparative advantage. We also examine the effects of infrastructure on the sectoral composition of output across countries. Using a three‐stage least‐squares estimation strategy to control for endogeneity of infrastructure provision, we find that infrastructure, especially roads, helps to explain patterns of comparative advantage and international specialization.     

Capacity constraints, asymmetries, and the business cycle

We study how an occasionally binding capacity constraint affects the properties of business cycles. A real business cycle model is constructed where production takes place at individual plants and the number of plants operated varies over the cycle. The capacity constraint binds in states where all plants are operated. We derive the aggregate production function for this economy, which turns out to differ from the standard Cobb–Douglas function while retaining its desirable properties. The business cycle features of this one-sector growth model are similar to those of a standard real business cycle model in most respects. Our model does, however, display some properties of actual economies that standard models do not. In particular, business cycles in our model are asymmetric—troughs are deeper on average than peaks are tall. Also, labor's share of income is counter-cyclical, as it is in US data.     

PRODUCTIVE RECESSIONS AND JOBLESS RECOVERIES

We explore international variation in business cycle dynamics to gain insights into the recent pattern of robust productivity growth during downturns (productive recessions) and weak employment growth during recoveries (jobless recoveries) seen in some advanced economies. We find that sectoral change is associated with productive recessions but that labor market rigidity can impede reallocation and reduce the probability of a productive recession. We also find evidence of a link between productive recessions and jobless recoveries and that recessions dominated by reductions to employment, rather than changes in average employee hours, are more likely to be associated with jobless recoveries. (JELF44, E32)     

A real business cycle model with tradable and non-tradable goods for the Spanish economy

Over the last years, the business cycles of the Spanish economy have been analyzed from different points of view. Under the paradigm of the real business cycles, the standard model has been extended in several dimensions. However, none of them have taken into account the fact that in this economy the presence of non-tradable goods is one of the largest in the world. When this feature is properly taken into account, the modeled real business cycle small open economy, calibrated for Spanish data, is able to explain several distinct stylized facts for this economy. In particular, it explains the larger than standard volatility of private consumption, and the different cyclical properties of inflation for non-tradable and tradable goods. Furthermore, the theoretical model is able to adequately explain some other cyclical properties of Spanish macroeconomic variables, both at the aggregate and sectoral levels.     

MONEY, CREDIT, AND BUSINESS CYCLE COMOVEMENT

Abstract.  We developed a two-sector general equilibrium model with money and credit to study cross-sector comovement over the business cycle. Through a working capital channel, both money and productivity shocks can generate procyclicality of sectoral activities and positive cross-sector correlations of output, employment and investment. In our model, firms in each sector borrow in the credit market to finance their purchase of labour inputs, part of which are used in the adjustment process of capital stock. The shocks affect sectoral employment and investment through their impacts on interest rates and external finance premia.     

Trans‐Tasman Transmission of Government Spending Shocks

This paper investigates the international transmission of fiscal shocks between two closely‐linked, open economies. We estimate impulse response functions using a semi‐structural vector auto regressive (VAR) model and quarterly data from Australia and New Zealand for the period 1973:3–2008:4. We compare our empirical results with impulse response functions from a calibrated two‐country international real business cycle model with habit formation and adjustment costs to investment. We show that a positive shock to Australian government consumption leads to an increase in Australian output initially and then to a decline in the medium term, while the New Zealand output is negatively affected both in the short and medium term. This result is in line with the recent literature that reports beggar‐thy‐neighbour effect of positive government spending shocks.     

Staggered wages,financial frictions,and the international comovement problem

Standard international real business cycle models often generate negative cross-country correlations in labor and investment. The data, however, display positive correlations. This paper studies the effect of real wage rigidity and financial frictions on international comovement. We find that staggered wages mainly improve the cross-country correlation of labor, while financial frictions improve investment comovement. However, each friction alone cannot account for the magnitude of international correlations of either variable. When the two imperfections are introduced together, the effect of each friction endogenously reinforces the other and the model generates realistic correlations in both variables.     

THE 2007–2008 U.S. RECESSION: WHAT DID THE REAL‐TIME GOOGLE TRENDS DATA TELL THE UNITED STATES?

In the extant literature of business cycle predictions, the signals for business cycle turning points are generally issued with a lag of at least 5 months. In this paper, we make use of a novel and timely indicator—the Google search volume data—to help to improve the timeliness of business cycle turning point identification. We identify multiple query terms to capture the real‐time public concern on the aggregate economy, the credit market, and the labor market condition. We incorporate the query indices in a Markov‐switching framework and successfully “nowcast” the peak date within a month that the turning occurred. (JEL E37, G17)     

Measuring business cycles: A temporal disaggregation model with regime switching

In this paper, we propose a temporal disaggregation model with regime switches to disaggregate U.S. quarterly GDP into monthly figures. Alternative to the existing literature, our model is able to capture the nonlinear behaviors of both aggregated and disaggregated output series as well as the asymmetric nature of business cycle phases. To demonstrate the applicability of the proposed model, we apply the model with a Markov trend component to U.S. quarterly real GDP. The results suggest that the combination of a temporal disaggregation model with Markov switches leads to a successful representation of the data relative to the existing literature. Also, the inferred probabilities of unobserved states are clearly in close agreement with the NBER reference cycle on a monthly basis, which highlights the importance of nonlinearities in business cycle.     

Financial cycle and business cycle: An empirical analysis based on the data from the U.S

In this paper, we first study the relationship between the financial cycle and the business cycle in the time and frequency domain. Then we also explore the interactions and dynamic mechanisms of the financial cycle, the business cycle, real interest rate and exchange rate by the VAR model. The empirical results show that the financial cycle is closely related to the business cycle, especially at medium-term frequencies (8–30 years), the business cycle leads the financial cycle with a high positive correlation. However, the relationship between them is not significant during the Great Moderation at business-cycle (2–4 years). In addition, the financial cycle not only becomes a main driver of real interest rate, the financial cycle and the business cycle, but also serves as an important source of the business cycle fluctuations. In general, our results lay some theoretical foundation for the policy practice of financial and economic stability.