Endogenous Fluctuations and International Business Cycles

41 Pages Posted: 30 Nov 2016 Last revised: 12 Mar 2021

See all articles by Stephen McKnight

Stephen McKnight

El Colegio de México

Laura Povoledo

University of the West of England - Bristol Business School

Date Written: February 28, 21

Abstract

We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition to analyze the role of self-fulfilling expectations or beliefs in explaining international business cycles. We find that when self-fulfilling beliefs are correlated with technology shocks, the model can account for the counter-cyclical behavior observed for the terms of trade and real net exports, while simultaneously generating higher volatilities relative to output, as in the data. The choice of the labor supply elasticity is shown to be critical for generating a negative correlation between the real exchange rate and relative consumption, thereby resolving the Backus-Smith puzzle.

Keywords: Indeterminacy; Sunspots and Self-Fulfilling Expectations; International Business Cycles; Net Exports; Terms of Trade; Consumption-Real Exchange Rate Anomaly; Combined Impulse Responses.

JEL Classification: E32, F41, F44

Suggested Citation

McKnight, Stephen and Povoledo, Laura, Endogenous Fluctuations and International Business Cycles (February 28, 21). Available at SSRN: https://ssrn.com/abstract=2876684 or http://dx.doi.org/10.2139/ssrn.2876684

Stephen McKnight

El Colegio de México ( email )

Camino al Ajusco 20,
Pedregal de Santa Teresa
México, D.F.
Mexico

Laura Povoledo (Contact Author)

University of the West of England - Bristol Business School ( email )

Frenchay Campus
Bristol, BS16 1QY
United Kingdom

HOME PAGE: http://www.povoledo.it

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
45
Abstract Views
509
PlumX Metrics