Cointegrated TFP Processes and International Business Cycles

Pau Rabanal, Vicente Tuesta and Rubio-Ramirez, Juan F.

No 09/212, IMF Working Papers from International Monetary Fund

Abstract: A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the "rest of the world," is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.

Keywords: Business cycles; Consumer goods; Demand; Economic models; Exchange rates; External shocks; Industrial production; International trade; Price elasticity; Prices; Private consumption; Productivity; Real effective exchange rates; Spillovers (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba and nep-opm
Date: 2009-09-29

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