Multiple Stages of Processing and the Quantity Anomaly in International Business Cycle Models

FRB of Kansas City Working Paper No. 04-05

FRB Philadelphia Working Paper No. 04-8

40 Pages Posted: 5 Aug 2004

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Date Written: June 2004

Abstract

We construct a two-country DSGE model with multiple stages of processing and local currency staggered price-setting to study cross-country quantity correlations driven by monetary shocks. The model embodies a mechanism that propagates a monetary surprise in the home country to lower the foreign price level while restraining the home price level from rising too quickly; and, it does so through reducing material costs in terms of the foreign currency unit while dampening the upward movements in the costs in terms of the home currency unit, both in absolute terms and relative to the costs of primary factors. We show that, through this mechanism and a resulting factor substitution effect, the model is able to generate significant cross-country quantity correlations, with correlations in consumption considerably lower than correlations in output, as in the data.

Keywords: Stages of Processing, Monopolistic Competition, Local Currency Pricing, Welfare

JEL Classification: E32, F31, F41

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng, Multiple Stages of Processing and the Quantity Anomaly in International Business Cycle Models (June 2004). FRB of Kansas City Working Paper No. 04-05; FRB Philadelphia Working Paper No. 04-8. Available at SSRN: https://ssrn.com/abstract=557239 or http://dx.doi.org/10.2139/ssrn.557239

Kevin X. D. Huang (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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