Modeling News-Driven International Business Cycles

Abstract

This paper reexamines the question of how to explain business cycle co-movements within and between countries. First, we present two simple theoretically flexible price models to illustrate how and why news shocks can generate robust positive co-movements in economic activity across countries. We also discuss under what conditions the multi-sector version of the model generates appropriate business cycle patterns within countries. Second, we develop a quantitative two-country multi-sector model that is capable of replicating many international business cycle facts. The model is a two-country extension of the closed economy model of Beaudry and Portier [2004], in which there are limited possibilities to reallocate factors between investment and consumption good sectors.

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Reference

Paul Beaudry, Martial Dupaigne, and Franck Portier, “Modeling News-Driven International Business Cycles”, TSE Working Paper, n. 09-117, November 2009.