Sectoral interdependence and business cycle synchronization in small open economies

Drago Bergholt and Tommy Sveen ()

No 2014/04, Working Paper from Norges Bank

Abstract: Existing DSGE models are not able to reproduce the observed influence of international business cycles on small open economies. We construct a two-sector New Keynesian model to address this puzzle. The set-up takes into account intermediate trade and producer heterogeneity, where goods and service industries differ in terms of i) price flexibility, ii) trade intensity, iii) technology, iv) I-O structure, and v) the volatility of productivity innovations. The combination of intermediate markets and heterogeneous producers makes international business cycles highly important for the small economy, even if it has a large service sector. Exploiting I-O matrices of Canadian and US industries, the model is able to reproduce the role of international disturbances typically found in empirical studies. Model simulations deliver cross-country correlations in macroeconomic variables of about 0:7, with half of the variation in domestic variables attributed to foreign shocks.

Keywords: Small open economy; Multi-sector; Intermediate trade; International business cycles. (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-04-14
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (15)

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http://www.norges-bank.no/en/Published/Papers/Working-Papers/2014/201404/

Related works:
Working Paper: Sectoral Interdependence and Business Cycle Synchronization in Small Open Economies (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2014_04

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