Variable Factor Utilization and International Business Cycles

Marianne Baxter () and Dorsey Farr

No 8392, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When an economic boom produces high output, employment, and investment in the United States, there is usually a simultaneous boom in other industrialized countries. But, why? Answering this question is a central goal of international macroeconomics. However, multi-country dynamic equilibrium models have struggled with two major problems. The first difficulty is that the productivity shocks required by the model are implausibly large and volatile. Second, these models have difficulty explaining why factor inputs move together so closely across countries: realistic international comovement of business cycles requires implausibly high cross-country correlations of productivity shocks. This paper builds a model in which the utilization rates of capital and labor can be varied in response to shocks. We find that variable factor utilization is quite successful in (i) reducing the required size of productivity shocks; and (ii) increasing international comovement of factor inputs, with most of the improvement stemming from variable capital utilization.

JEL-codes: F2 F4 (search for similar items in EconPapers)
Date: 2001-07
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (35)

Published as Baxter, Marianne and Dorsey D. Farr. "Variable Capital Utilization And International Business Cycles," Journal of International Economics, 2005, v65(2,Mar), 335-347.

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