International business cycle co-movement and vertical specialization reconsidered in multistage Bayesian DSGE model

Chin-Yoong Wong and Yoke-Kee Eng ()

International Review of Economics & Finance, 2013, vol. 26, issue C, 109-124

Abstract: Business cycle co-movements across countries have been widely documented, and East Asian economies show no exception. We reevaluate a Bayesian estimated two-country real business cycle model with non-sequentially traded intermediates and a New Keynesian model that incorporates simple vertical specialization using trade-weighted observable series of nine East and Southeast Asian economies. Unsurprisingly, counterfactual co-movements are generated. The failure of these models, we argue, stems from the inappropriate formalization of vertical linkage in production and trade. By extending a two-country New Keynesian model with three processing stages to authentically embrace vertical specialization in the form of vertical and processing trade, we show that the Bayesian estimated model is capable of replicating satisfactorily the business cycle co-movements over a large set of macroeconomic variables. And the quantitative ability survives a battery of sensitivity analysis. We thus infer that formalizing vertical and sequential linkage in production through the lens of three processing stages is a fruitful exercise for an international business cycle model to solve trade-comovement puzzle.

Keywords: International business cycle; Vertical specialization; Bayesian estimation; Trade-comovement puzzle (search for similar items in EconPapers)
JEL-codes: C11 F41 F44 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:26:y:2013:i:c:p:109-124

DOI: 10.1016/j.iref.2012.08.011

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