Does the Number of Countries in an International Business Cycle Model Matter?

51 Pages Posted: 15 Apr 2019

See all articles by Myunghyun Kim

Myunghyun Kim

The Bank of Korea; The Bank of Korea-Economic Research Institute

Date Written: April 15, 2019

Abstract

Until the 1990s, standard models with two large open economies (i.e. the U.S. and Europe) provided plausible representations of the world economy. However, with the emergence of many countries such as China since then, this approach no longer seems reasonable. In line with this change to the global economic environment, there also have been changes in cross-country correlations: the output correlation between the U.S. and Europe has risen, and their consumption correlation has slightly fallen. Accordingly, this paper adds many countries to a standard model to show that doing so can capture the transition in the cross-country correlations. By analytical investigation, I first show that as the number of countries in a simple model increases, the output correlation rises and the consumption correlation falls. A quantitative analysis with a more general model also shows that when the model has more countries, it yields a higher output correlation and a smaller consumption correlation.

Keywords: International Business Cycles, Number of Countries, n-Country Model, Output Correlation, Consumption Correlation

JEL Classification: F40, F41, F44

Suggested Citation

Kim, Myunghyun, Does the Number of Countries in an International Business Cycle Model Matter? (April 15, 2019). Bank of Korea WP 2019-16. Available at SSRN: https://ssrn.com/abstract=3371975 or http://dx.doi.org/10.2139/ssrn.3371975

Myunghyun Kim (Contact Author)

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

The Bank of Korea-Economic Research Institute ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

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