Business Cycles Through International Shocks: A Structural Investigation

Abstract

This paper investigates the sources of output volatility by decomposing the international shocks into finance and trade shocks. Through structural Bayesian estimations of an open-economy DSGE model on 16 countries, on average, it is found that international shocks explain around 70% of output fluctuations. Across countries, the decomposition of international shocks shift toward trade shocks as the price stickiness falls, as steady-state real interest rate increases, as the weight given to output in the Taylor rule increases, or as the interest-rate smoothing increases.

Keywords: Cycles, Monetary Policy, International Trade Costs

JEL Classification: E32, E52, F41