Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements

77 Pages Posted: 14 Nov 2007 Last revised: 4 Apr 2015

See all articles by Alan C. Stockman

Alan C. Stockman

University of Rochester - Department of Economics; National Bureau of Economic Research (NBER)

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1990

Abstract

This paper studies the international transmission of business cycles by developing a two-country real business-cycle model and confronting it with a broad set of empirical observations. These observations include variances and covariances of output, labor, consumption, employment, and investment in traded and nontraded sectors of the economy, cross-country correlations of output and consumption, and correlations between quantities and relative prices. We find that technology shocks as measured by observed total factor productivity (by sector) must be supplemented by other sources of disturbances to explain certain features of the data. We call these other disturbances taste shocks, though they may stand in for some other shocks. In particular, it is difficult to explain the observed comovements of the relative price of nontraded to traded goods with the relative consumption of those goods without invoking something like taste shocks. Our model is roughly consistent with a broad set of observations, though puzzles emerge regarding the correlation of nontraded-sector output with its relative price and the variance of the balance of trade.

Suggested Citation

Stockman, Alan C. and Tesar, Linda L., Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements (December 1990). NBER Working Paper No. w3566. Available at SSRN: https://ssrn.com/abstract=471536

Alan C. Stockman (Contact Author)

University of Rochester - Department of Economics ( email )

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Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

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United States
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734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

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United States

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