Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel

Kollmann, Robert

Explaining International Business Cycle Synchronization: Recursive Preferences and the Terms of Trade Channel

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: The business cycles of advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple model of a two-country, two-tradedgood, complete-financial-markets world in which country-specific productivity shocks generate business cycles that are highly correlated internationally. The model assumes recursive intertemporal preferences (Epstein-Zin-Weil), and a muted response of labor hours to household wealth changes (due to Greenwood-Hercowitz-Huffman period utility and demand-determined employment under rigid wages). Recursive intertemporal preferences magnify the terms of trade response to country-specific shocks. Hence, a productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade, which raises foreign labor demand. With a muted labor wealth effect, foreign labor and GDP rise, i.e. domestic and foreign real activity comove positively.

Keywords: international business cycle synchronization; recursive preferences; trade; real exchange; wealth effect on labor supply (search for similar items in EconPapers)
JEL-codes: F31 F32 F36 F41 F43 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2017-03
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/2484 ... LMANN-explaining.pdf Full text for the whole work, or for a work part (application/pdf)

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eca:wpaper:2013/248464

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/248464

Access Statistics for this paper

More papers in Working Papers ECARES from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().