International Business Cycles with Mutliple Input Investment Technologies

P. Marcelo Oviedo and Rajesh Singh

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Backus, Kehoe, and Kydland (International Real Business Cycles, JPE, 100 (4), 1992) documented several discrepancies between the observed post-war business cycles of developed countries and the predictions of a two-country, complete-market model. The main discrepancy dubbed as the quantity anomaly, that cross-country consumption correlations are higher than that of output in the model as opposed to the data, has remained a central puzzle in international economics. The main thesis of this paper is that when the standard two-country model with traded and non-traded goods and complete ¯nancial markets, as in Stockman and Tesar (Tastes and Technology in a Two Country Model of the Business Cycles: Explaining International Comovements, 85 (1), AER, 1995) is extended to include capital goods sectors that utilize both traded and non-traded goods as intermediates, and when the non-traded aggregate is reclassi¯ed to include distribution and transportation services, the model produces the correct ordering of the cross-country correlations of consumption and output.

Keywords: International business cycles; Quantity anomaly; Distribution costs; Cross-country correlations. (search for similar items in EconPapers)
JEL-codes: F32 F34 F41 (search for similar items in EconPapers)
Date: 2008-03-31
New Economics Papers: this item is included in nep-dge and nep-opm
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