Cointegrated TFP Processes and International Business Cycles
International Monetary Fund
Deutsche Bank AG
Juan Francisco Rubio-Ramirez
Duke University - Department of Economics; Federal Reserve Bank of Atlanta - Research Department
IMF Working Paper No. 09/212
A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the rest of the world, is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.
Number of Pages in PDF File: 54
Keywords: Business cycles, Consumer goods, Demand, Economic models, Exchange rates, External shocks, Industrial production, International trade, Price elasticity, Prices, Private consumption, Productivity, Real effective exchange rates, Spilloversworking papers series
Date posted: October 13, 2009
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