News and Business Cycles in Open Economies

25 Pages Posted: 5 Jun 2008

See all articles by Nir Jaimovich

Nir Jaimovich

University of Zurich

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Abstract

It is well known that the neoclassical model does not generate comovement among macroeconomic aggregates in response to news about future total factor productivity. We show that this problem is generally more severe in open economy versions of the neoclassical model. We present an open economy model that generates comovement both in response to sudden stops and to news about future productivity and investment-specific technical change. We find that comovement is easier to generate in the presence of weak short-run wealth effects on the labour supply, adjustment costs to labour, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt.

Keywords: comovement, news, open economy

JEL Classification: F4

Suggested Citation

Jaimovich, Nir and Tavares Rebelo, Sergio, News and Business Cycles in Open Economies. CEPR Discussion Paper No. DP6520. Available at SSRN: https://ssrn.com/abstract=1140047

Nir Jaimovich

University of Zurich ( email )

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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