By force of demand: Explaining cyclical fluctuations of international trade and government spending |
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| Affiliation: | 1. Instituto de Economía, Pontificia Universidad Católica de Chile, Chile;2. Department of Economics, University of Washington, 305 Savery Hall, Box 353330, Seattle, WA 98195, United States;1. Senshu University, 2-1-1 Higashimita, Tama-ku, Kawasaki, Kanagawa 214-8580, Japan;2. The Canon Institute for Global Studies, 1-5-1 Marunouchi, Chiyoda-ku, Tokyo 100-6511 Japan;1. School of Economics and Commerce, South China University of Technology, Guangzhou, Guangdong 510006, People’s Republic of China;2. Lingnan (University) College, Sun Yat-Sen University, Guangzhou, Guangdong 510275, People’s Republic of China;3. Queens College, The City University of New York, 65-30 Kissena Blvd. Flushing, NY 11367, USA;4. The Development Research Center of GZ National Innovation-oriented City, Guangzhou, Guangdong 510006, People’s Republic of China;1. University of Arkansas, United States;2. Economic Science Institute, Chapman University, United States;3. University of Alaska Anchorage, United States;1. Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, USA;2. Department of Economics, Robins School of Business, University of Richmond, Richmond, VA 23173, USA;1. Finance Center Muenster, University of Muenster, Universitätsstr. 14-16, D-48143 Münster, Germany;2. House of Finance, Goethe University Frankfurt, Theodor-W.-Adorno-Platz 3, D-60323 Frankfurt am Main, Germany;3. Oliver Wyman, Friedrich-Ebert-Anlage 49, D-60308 Frankfurt am Main, Germany |
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| Abstract: | This paper explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles within the international real business cycle (IRBC) framework. In addition to those well-documented domestic business cycle fluctuations (e.g., the volatility and cyclicality of output, consumption, investment, labor hours, and labor productivity) and international business cycle properties (e.g., the countercyclical net export and the comovement puzzle), this paper focuses on two additional stylized facts in the industrialized countries: the procyclical trade openness (the GDP fraction of trade volume) and the countercyclical government size (the GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, we show that the model׳s predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other domestic and international business cycle properties. An estimated version of the model confirms the quantitatively important impacts of demand shocks. |
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| Keywords: | Demand shocks Trade openness Government spending International business cycles |
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