International correlation of business cycles in a behavioral macroeconomic model

Paul De Grauwe and Yuemei Ji ()

No 11257, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of “animal spirits†, i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We do not need a correlation of exogenous shocks to generate synchronization. We also empirically test the main predictions of the model.

Keywords: Animal spirits; Behavioral macroeconomics; Business cycles (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-mac, nep-opm and nep-pke
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Citations: View citations in EconPapers (9)

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