Can indeterminacy and self-fulfilling expectations help explain international business cycles?

Stephen McKnight and Laura Povoledo

Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. We find that a combination of productivity and sunspot shocks can account for the observed counter-cyclical behavior in international relative prices and quantities, while simultaneously generating volatilities that match the data. The indeterminacy model can also resolve the Backus-Smith puzzle without requiring a low value of the trade elasticity.

Keywords: Indeterminacy; Sunspots; International Business Cycles; Net Exports; Terms of Trade; Real Exchange Rate; Backus-Smith Puzzle (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2015-01-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/E ... s%202015/wp-1504.pdf

Related works:
Working Paper: Endogenous Fluctuations and International Business Cycles (2021)
Working Paper: Can indeterminacy and self-fulfilling expectations help explain international business cycles? (2016)
Working Paper: Can indeterminacy and self-fulfilling expectations help explain international business cycles? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:uwe:wpaper:20151504

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