Heckscher-Ohlin Business Cycles

Abstract

This paper introduces Heckscher-Ohlin trade features into a two-country DSGE model, and studies how productivity shocks propagate through trade in goods. In comparison with standard models, (i) transitory shocks to productivity have permanent effects on country-level aggregate variables; (ii) aggregate productivity shocks have relevant effects on the sectoral allocation of production factors; (iii) the business cycle properties of our model are broadly compatible with the empirical evidence; (iv) under complete asset markets, the international correlation of consumption is lower than that of output.

Keywords: International Trade, Heckscher-Ohlin, Business Cycles, Productivity Shocks

JEL Classification: E32, F11, F32, F41