THE ROLE OF TRANSITORY AND PERSISTENT SHOCKS IN THE CONSUMPTION CORRELATION AND INTERNATIONAL COMOVEMENT PUZZLES

Tatsuma Wada

Macroeconomic Dynamics, 2014, vol. 18, issue 6, 1234-1270

Abstract: We study a two-country model with changes in the technological growth rate. Such changes are attributed to transitory and persistent shocks in the growth rate of technology. Cases are considered in which agents in two countries do not have enough information to distinguish between the two types of shocks; gradually, however, the persistence of the shock is recognized through the learning process. Utilizing a set of parameters obtained from U.S. and European productivity growth rates, it is then shown that (i) when persistent shocks affect the two countries identically, there is no consumption-correlation puzzle, and the international comovement puzzle becomes imperceptible; and (ii) even when persistent shocks affect the two countries differently, imperfect information plays an important role in explaining both the consumption-correlation puzzle and the international comovement puzzle (provided transitory shocks are strongly internationally correlated and are relatively larger than persistent shocks).

Date: 2014
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