Cointegrated TFP processes and international business cycles

Abstract

A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that total factor productivity processes for the United States and the rest of the world are characterized by a vector error correction model (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also, we show that the observed increase of the real exchange rate volatility with respect to output in the past twenty years can be explained by changes in the parameter of the VECM.

Is infrastructure capital productive? A dynamic heterogeneous approach

“… See Glick and Rogoff (), Gregory and Head () and Rabanal et al . (). Common technological shocks could reflect, for example, shifts of the global technological frontier.…”

Stochastic Growth in the United States and Euro Area

“…Along exactly these lines, however, the results from Table 1 and Figure 2 highlight that even with these restrictions imposed, the estimated model implies that the growth rates of neutral and investment‐specific technological change, though equal in the long run, converge across countries very slowly. This same feature of the estimated model also plays a key role in Rabanal, Rubio‐Ramirez, and Tuesta’s (2009) study, which shows how the extremely slow convergence of productivity trends across countries can work to greatly magnify the responsiveness of the real exchange rate to technology shocks.…”

“…The form of the labor adjustment cost must vary across (2) and (3) to reflect the fact that in the model with nonstationary preference shocks, hours worked L H t inherits a stochastic trend from the preference shock M H t and therefore grows in the long run at the same gross rate m as the preference shock itself. Also, as in Rabanal, Rubio‐Ramirez, and Tuesta (2009), both adjustment cost terms must be scaled by a factor U H t , equal to for the model with stationary preference shocks and for the model with nonstationary preference shocks, where Z H t is the home neutral technology shock, V H t is the home investment‐specific technology shock, and the parameter α measures capital’s share in production, so that these costs expand in line with the overall economy in this model with long‐run growth. The bond adjustment cost parameter ϕ d must be strictly positive for the model to have a unique steady‐state growth path, the labor adjustment cost parameter ϕ l is nonnegative, and the form of both adjustment cost specifications is such that the level of these costs is zero along the steady‐state growth path.…”

“…Following Rabanal, Rubio‐Ramirez, and Tuesta (2009), the neutral and investment‐specific technology shocks are assumed to be nonstationary but cointegrated, so that for all t = 0, 1, 2, … . In equations (10)–(), z and v are positive parameters governing the long‐run average rates of neutral and investment‐specific technological progress in both countries along the model’s steady‐state growth path, , , , and , all lying between zero and one, are parameters governing the persistence of movements in the growth rates of the neutral and investment‐specific technology shocks, , , , and are nonnegative error‐correction parameters governing the speed of technological convergence across the two economies, and , , , and are mutually and serially uncorrelated innovations that are normally distributed with zero means and standard deviations , , , and .…”

Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks

“…Let μ A , t ≡ A t / A t − 1 and denote the growth rate of Home and Foreign TFP shocks. The logarithms of μ A , t and are assumed to follow the following vector error correction (VEC) processes: A similar VEC representation of the technology processes is also used in Rabanal et al (). They show that the technology processes in the US and the ROW are characterized by a VEC model.…”