Endogenous Fluctuations and International Business Cycles

Stephen McKnight and Laura Povoledo

Serie documentos de trabajo del Centro de Estudios Económicos from El Colegio de México, Centro de Estudios Económicos

Abstract: We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition to analyze the role of self-fulfilling expectations or beliefs in explaining international business cycles. We find that when self-fulfilling beliefs are correlated with tecnology shocks, the model can account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously generating higher volatilities relative to output, as in the data. The choice of the labor supply elasticity is shown to be critical for generating a negative correlation between the real exchange rate and relative consumption, thereby resolving the Backus-Smith puzzle.

Keywords: Indeterminacy; Sunspots and Self-Fulfilling Expectations; International Business Cycles; Net Exports; Terms of Trade; Consumption-Real Exchange Rate Anomaly; Combined Impulse Responses (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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https://cee.colmex.mx/dts/2021/DT-2021-10.pdf (application/pdf)

Related works:
Journal Article: Endogenous fluctuations and international business cycles (2022)
Working Paper: Can indeterminacy and self-fulfilling expectations help explain international business cycles? (2016)
Working Paper: Can indeterminacy and self-fulfilling expectations help explain international business cycles? (2016)
Working Paper: Can indeterminacy and self-fulfilling expectations help explain international business cycles? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:emx:ceedoc:2021-10

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