International real business cycles with endogenous markup variability |
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| Institution: | 1. Research Department, Federal Reserve Bank of Dallas, 2200 N. Pearl St., Dallas, TX 75201, United States;2. Department of Economics, Vanderbilt University, VU Station B #351819, 2301 Vanderbilt Place, Nashville, TN 37235-1819, United States;1. LUISS School of European Political Economy (SEP), LUISS Guido Carli University, Via di Villa Emiliani 14, 00197, Rome, Italy;2. Rome Tre University, Department of Law, Via Ostiense, 161, 00154, Roma, Italy;3. Consiglio per la Ricerca in Agricoltura e l''analisi dell''economia agraria (CRA), Via della Navicella 2-4, I-00184, Rome, Italy;1. Delft University of Technology, Department Technology, Policy and Management, Jaffalaan 5, NL-2628 BX Delft, The Netherlands;2. Ecorys, Department Markets and Competition, Watermanweg 44, NL-3067 GG Rotterdam, The Netherlands;1. Global Market Solutions R&D center, 7 Cité de l’Ameublement, 75011 Paris, France;2. Université Paris-Saclay/CentraleSupélec, Laboratoire Genie Industriel, France;1. Goethe University, Germany;2. Fordham University, United States;1. Economics Department, Harvard University, Cambridge, MA, United States;2. Industrial Structure Policy Division, Ministry of Economy, Trade and Industry, Tokyo, Japan;3. RIETI, Tokyo, Japan;1. Yale School of Medicine, New Haven, Connecticut;2. Department of Therapeutic Radiology, Yale School of Medicine, New Haven, Connecticut;3. Department of Neurosurgery, Yale School of Medicine, New Haven, Connecticut |
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| Abstract: | The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model. |
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