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Factor proportions and international business cycles

Jin, Keyu and Li, Nan (2011) Factor proportions and international business cycles. CEP Discussion Paper, No. 1090. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: No. 1090

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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2011 The Authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 20 Feb 2012 12:25
Last Modified: 14 Nov 2012 10:19
URI: http://eprints.lse.ac.uk/id/eprint/41946

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