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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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)|
|Additional Information:||© 2011 The Authors|
|Uncontrolled Keywords:||international business cycles, international comovement, composition effects|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory|
|Journal of Economic Literature Classification System:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics|
|Sets:||Departments > Economics
Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
|Identification Number:||No. 1090|
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