Factor proportions and international business cycles

Keyu Jin and Nan Li

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Positive investment comovements across OECD economies as observed in the data are difficult to replicate in open-economy real business cycle models, but also vary substantially in degree for individual country-pairs. This paper shows that a two-country stochastic growth model that distinguishes sectors by factor intensity (capital-intensive vs. labor-intensive) gives rise to an endogenous channel of the international transmission of shocks that first, can substantially ameliorate the “quantity anomalies” that mark large open-economy models, and second, generate a cross-sectional prediction that is strongly supported by the data: investment correlations tend to be stronger for country-pairs that exhibit greater disparity in the factor-intensity of trade. In addition, three new pieces of evidence support the central mechanism: (1) the production composition of capital versus labor-intensive sectors changes over the business cycle; (2) the prices of capital-intensive goods and labor-intensive goods are respectively, procyclical and countercyclical; (3) a positive productivity shock in the U.S. tilts the composition of production towards capital-intensive sectors in other countries.

Keywords: international business cycles; international comovement; composition effects (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2011-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://eprints.lse.ac.uk/41946/ Open access version. (application/pdf)

Related works:
Working Paper: Factor Proportions and International Business Cycles (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:41946

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