Searching for the source of macroeconomic integration across advanced economies

Uluc Aysun

No 2015-01, Working Papers from University of Central Florida, Department of Economics

Abstract: This paper estimates a two-country open economy DSGE model by using U.S. and Euro Area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macro-economic correlation in the data. I search for the determinants of this correlation by reconfiguring the model?s shock processes in two ways. First, I include shocks that symmetrically affect each region. Second I allow for the transmission of shocks between the two regions. While both of these changes considerably improve the model?s per-formance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both speci?cations, comovements of variables are mostly determined by demand and ?nancial shocks. Productivity, cost-push and exchange rate shocks, by contrast, play a limited role.

Keywords: Macroeconomic integration; DSGE; Bayesian estimation; U.S.; Euro Area (search for similar items in EconPapers)
JEL-codes: E32 F41 F42 F44 (search for similar items in EconPapers)
Pages: 49 Pages
Date: 2015-01
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-opm
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Journal Article: Searching for the source of macroeconomic integration across advanced economies (2016)
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