Faraway, so close! International transmission in the medium-term cycle of advanced economies

Mónica Correa-López and Beatriz de Blas

Journal of International Economics, 2021, vol. 132, issue C

Abstract: Large US firms, by diffusing embodied technology through trade in intermediates, appear to drive Europe's output over the medium term. We develop a two-country model of endogenous growth in varieties, cross-country firm heterogeneity and trade to match this evidence. A US TFP slowdown generates a pronounced recession in Europe, while a negative investment-specific shock also imparts a protracted recession in the US since GDP and firm productivity stay below trend beyond a decade. Heterogeneous firms, with endogenously changing productivity cut-offs, and the responses of innovators and adopters determine medium-term adjustment, as import switching processes unfold.

Keywords: Medium-term business cycles; International trade; Embodied growth; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: E32 F44 L11 O33 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:132:y:2021:i:c:s0022199621000787

DOI: 10.1016/j.jinteco.2021.103498

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