Can Sticky Price Models Generate Volatile and Persistent RealExchange Rates?

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption–real exchange rate anomaly , is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.     

Determinants of international transmission of business cycles to Turkish economy

This study aims to investigate the channels through which international business cycles are transmitted to Turkish economy. Our analysis follows two steps: i) business cycle transmission is measured using Longest Common Subsequence (LCS) method, a pattern recognition algorithm that accounts for the nonlinear and time-varying nature of business cycles and ii) the potential mechanisms of propagation of international business cycles are examined by specifying a panel regression model in which the LCS measure of synchronization is used as the dependent variable. Applying several panel estimation methods to the bilateral data from 22 countries over the 1998–2009 periods, we find that both trade and financial similarities are significant in the transmission of business cycles to Turkish economy. Especially, the results highlight the role of trade integration indicating that Turkish business cycles are closely linked with the business cycles of the members of European Custom Union.     

International Business Cycles and Exchange Rates

Models of international real business cycles are not able to account for the high volatility of exports, imports, the trade balance, and the terms of trade. By introducing exogenous exchange rate movements in addition to standard technological shocks, the model presented here comes much closer to replicating the relatively high volatility observed in the data while also improving other moments.     

The extensive margin,sectoral shares,and international business cycles

Abstract This paper documents some previously neglected features of sectoral shares at business cycle frequencies in OECD economies. We find that the non‐traded output share is as volatile as aggregate GDP and for most countries is countercyclical. While the standard international real business cycle model has difficulty in accounting for these properties of the data, an extended model that allows for sectoral adjustment along both the intensive and the extensive margins does a much better job of replicating these statistics. The model also matches better the correlation between relative consumption growth and real exchange rate changes, a key measure of international risk‐sharing.     

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.     

US money supply and global business cycles: 1979–2009

This article investigates the effects of the US money supply shock on global business cycles by employing a global vector autoregressive model containing 26 economies over the period from 1979Q2 to 2009Q4. The US money supply is incorporated as an endogenous variable for the US and a global factor for other economies. When a positive US money supply shock hits the global economy, developed economies (such as the US, Euro area and the UK) will have neither real output decline nor inflation pressure, while China and some other developing countries are going to have a significant decline of real GDP. The international spillover of the liquidity effect exists. The global effects of quantitative easing are discussed as well.     

The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages

This paper examines the role of financial frictions in affecting the transmission of U.S. real and financial shocks to Canada using a dynamic stochastic general‐equilibrium model with an active banking sector and financial frictions. We find that the U.S. banking and interbank markets can be a potentially important source of variability of Canadian output and inflation—consistent with the financial crisis. The presence of both the demand and the real supply sides of credit in the model help to capture the stylized facts of both the domestic and the international business cycles.     

Heterogeneous capital and misintermediation

A perennial problem of financial markets is that of maturity mismatch, or misintermediation, a situation in which financial intermediaries fund long-term, illiquid loans with short-term liabilities. A previous theory concludes that misintermediation can be responsible for business cycles and yields procyclical behavior of surprises in real interest rates. This paper proposes a finite horizon structural model with the introduction of heterogeneous capital to formalize and develop that theory. An extended model with labor as well as a “harvesting” technology further investigates the impact of misintermediation on real factor prices. The model implied relationship between unanticipated changes in real interest rates and real outputs over time is examined in a subsequent empirical study, which provides preliminary evidence consistent with the hypothesis of misintermediation.     

Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone

In this paper we study business cycle correlations in the Eurozone and its determinants. Additionally, we also analyze the determinants of the lead and lag behavior of business cycles in the Eurozone. We explore the relevance, in the Eurozone context, using GDP and employment as the business cycle measures, of the determinants of business cycle synchronization identified in the literature, namely bilateral trade intensity, dissimilarity of labor market rigidity, dissimilarity in industrial structures, financial openness, and foreign direct investment relations. We estimate a simultaneous 4-equations model by Ordinary Least Squares (OLS) and three-stage least square to investigate empirically the above-mentioned determinants of business cycle correlation. Bilateral trade relations present a positive influence on business cycle correlations, while the dissimilarity of labor market rigidity presents a negative influence. The rest of the above-mentioned variables are non-significant. These results are robust to the use of the Hodrick–Prescott-filter and first differences as the de-trending methods, as well as the use of GDP as the business cycle measure, excluding the financial crisis years (2008 and 2009). Results for employment as the business cycle measure are in contrast with the previous ones, and found industrial dissimilarity to be the relevant variable to determine business cycles synchronization. In what concerns the determinants of the lead and lag behavior, results show that the member states of the Eurozone that usually lead the cycle are the ones that are wealthier, with strict employment legislation, more specialized in construction and finance sectors, and more prone to international capital movements. Differences in the determinants between contemporaneous business cycles and lead and lag behavior of business cycles are especially important for policy-makers in the Eurozone to know about, in particular if asymmetric shocks between countries are set in place.     

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 international business cycle as intertemporal coordination failure

Where investments are irreversible and the future is uncertain, people in two countries can make investment decisions that turn out to be mutually inconsistent. I argue that this intertemporal coordination failure explains international business cycles in a two-currency-area setting with a floating foreign exchange rate. The sequence of events starts with an expansionary domestic monetary shock, which decreases the domestic real interest rate. Facing low transactions costs, people spend the new money relatively early in the foreign exchange market and in the foreign market for loanable funds. Domestic monetary expansion thereby changes the relative prices of domestic and foreign goods and also of goods of earlier and later stages of production. The relative price changes lead to intertemporal and international coordination failures once the monetary expansion ends and relative prices change. Domestic monetary policy thereby causes the comovement across different currency areas we observe of business cycles.     

The Endogenity of the Optimum Currency Area Criteria

A country' suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia , the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialised countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.     

Interlinkage in the endogenous real business cycles of international economies

Summary This study investigates interlinkage among the business cycles of countries from the viewpoint of endogenous real business cycles. For this purpose, we build a simple perfect foresight equilibrium model with two countries and characterize the global dynamics of a free-trade equilibrium as well as that of each country's autarky equilibrium by means of the fundamental structure of an economy.We are greatful to Murray Kemp, Mukul Majumdar, Takashi Negishi, Marcus Noland, Ian Novos, Jose Scheinkman and an anonymous referee for useful conversations and suggestions.     

An Estimated DSGE Model for Business Cycle Analysis in China

A small-scale, but highly-stylized dynamic stochastic general equilibrium model is estimated by the maximum likelihood method using Chinese quarterly data. Model specifications and parameter equalities between various competing model variants are addressed by formal statistical hypothesis tests, while implications for business cycle fluctuations are evaluated via a variance decomposition experiment, second-moments matching, and some out-of-sample forecast exercises. It is highlighted that the monetary authority takes an aggressive stance to the current inflation pressure (there is a significant lagged response), while leaving less attention to changes in aggregate output. Variance decomposition reveals that large percentages of variations in real and nominal variables are explained by the highly volatile preference and potential output shock, respectively. When nominal and real frictions as well as additional shocks are included, overall our estimated model can successfully reproduce the stylized facts from actual data of Chinese business cycles and frequently can even outperform those forecasts from an unconstrained VAR.     

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.     

Outbound Business Travel Depends on Business Returns: Australian Evidence

In an earlier note, Collins and Tisdell (2002b ) explored the possibility of a long-run relationship between Australian business returns and international business travel. Using annual data they found that such a relationship exists. The purpose of this study is to further examine this relationship using quarterly data for the time frame 1974:1 to 1999:4. In addition, previous studies on international business travel have offered some but not strong evidence for the existence of a positive relationship between the level of international business travel and real GDP of the origin country. This study suggests that the aggregate return on business investments is a better predictor of international business travel than GDP. The Engle-Granger and Johansen's maximum-likelihood cointegration procedures are used to show a long-term relationship exists between Australian outbound business travel and Australian business returns, but not with Real Australian GDP. Reasons for this relationship are discussed.     

Labor-Market Search and International Business Cycles

The objective of this paper is to explain the observed international fluctuations by modifying the traditional modelling of the labor market in the two-country real business cycles model. Our intuition is that labor-market search can be useful to understand the propagation of international fluctuations. Changes in the expected returns to search induce responses in search and recruiting activities, the effects of which are propagated through time via changes in the stock of employment. Given that the technology shock spills over to the other country, domestic and foreign firms start searching at the same time in anticipation. Employment then increases simultaneously and displays a hump-shaped profile in the two countries. This partially curtails the capital outflow from the country which does not benefit from the shock. Introducing in a search framework a non-separability between consumption and leisure in the utility function allows both to solve the consumption puzzle and to complete the explanation of the international comovement puzzle. Journal of Economic Literature Classification Numbers: E32, F41, J40.     

Differentiating between business cycles and growth cycles: evidence from 15 developed countries

Growth cycles are often mistaken for business cycles, although these two have different statistical properties. In order to differentiate between them in a statistically satisfactory manner, the Bayesian information criterion-(BIC) based model-selection approach is presented. Business cycles are described by the cyclical trend model, and growth cycles are described by the trend-plus-cycle model. Whether the observed time series is derived from business cycles or from growth cycles is determined as a result of model selection. It is shown via data-based simulations that the proposed method works well in most situations. Empirical results obtained for 15 countries suggest that the business cycle model is selected for five countries, the growth cycle model is selected for two countries and the trend-plus-noise model is selected for eight countries.     

Business Cycles in an Estimated DSGE Model of China

A small-scale New-Keynesian dynamic stochastic general equilibrium model is estimated by maximum likelihood method using quarterly data of China. Model specifications and parameter equalities between various competing model variants are addressed by formal statistical hypothesis tests, while implications for business cycle fluctuations are evaluated via a variance decomposition experiment, second-moments matching, and some out-of-sample forecast exercises. It is highlighted that both forward and backward components are important for the dynamics of output, inflation and real balances. The monetary authority will take a sufficient aggressive stance, with a significant lagged response, to the current inflation pressure, while leaving less attention to changes in aggregate output. Variance decomposition reveals that large percentages of variations in real and nominal variables are explained by the highly volatile preference shock and potential output shock, respectively. When nominal and real frictions as well as additional shocks are included, our estimated model overall can successfully reproduce the stylized facts of business cycles in the actual data of China and even frequently outperform those forecasts from an unconstrained VAR.     

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.