Investment composition and international business cycles

Abstract

This paper studies a two country model with economies disaggregated into traded and nontraded sectors and in which investment goods as in practice are produced by combining inputs from all sectors. The model also accounts for nontraded distribution services employed in retailing traded goods to consumers. The results show that the model with multiple input investments outperforms the standard model in which sectoral output also serves as its capital. In particular, it substantially improves (a) the movements of trade balance and relative prices, (b) within country comovements of sectoral and aggregate quantities, and (c) cross-country comovements of output vis-à-vis consumption. Abstract This paper studies a two country model with economies disaggregated into traded and nontraded sectors and in which investment goods as in practice are produced by combining inputs from all sectors. The model also accounts for nontraded distribution services employed in retailing traded goods to consumers. The results show that the model with multiple input investments outperforms the standard model in which sectoral output also serves as its capital. In particular, it substantially improves (a) the movements of trade balance and relative prices, (b) within country comovements of sectoral and aggregate quantities, and (c) cross-country comovements of output vis-à-vis consumption.

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

“…2) Alternatively, the "international consumption correlation puzzle" or the "BKK puzzle." 3) In addition, Stockman and Tesar (1995) introduce non-traded goods and taste shocks, Ravn (1997) assumes a more general technology shock process, Kehoe and Perri (2002) add informational frictions, Corsetti, Dedola and Leduc (2008) consider the distributional sector, Dmitriev and Roberts (2012) consider Greenwood-Hercowitz-Huffman (GHH) preferences and internal habit formation in consumption, Oviedo and Singh (2013) introduce investment composition, Kim (2018) considers commodity trade structures, and so on. 4) For example, Faia (2007) uses financial frictions, Ueda (2012) introduces cross-border lendings and borrowings, and Kollmann (2017) considers recursive intertemporal preferences.…”

Does the Number of Countries in International Business Cycle Models Matter?

“…In addition, Baxter and Crucini () assume incomplete markets and highly persistent productivity shocks (i.e., unit‐root productivity shocks) that do not spill over from one country to the other, Ravn () assumes a more general technology shock process, Kehoe and Perri () add informational frictions, Heathcote and Perri () assume financial autarky, Corsetti, Dedola, and Leduc () consider the distributional sector, Dmitriev and Roberts () consider Greenwood–Hercowitz–Huffman preferences and internal habit formation in consumption, Oviedo and Singh () introduce investment composition, Kim () considers commodity trade structures, and so on.…”

Three essays on international economics

“…Table 3.1 reports the value of parameters. The whole parameters are borrowed from Oviedo and Singh (2013) where US is identified as Home and rest of the world as Foreign to calibrate and compute statistics on cross-country correlations; the only exception is the elasticity of substitution between traded and non-traded goods (for both consumption and investment). calculated by using the value of distribution service and share of input usage achieved from the data.…”

“…In chapter 3, "The Role of Investment Composition to Solve the Backus-Smith Puzzle," we develop a two-country international business cycle model to establish a negative correlation between the relative consumption and real exchange rate-puzzle discovered by Backus and Smith (1993). To conduct the study, we used a more realistic capital formation as proposed by Oviedo and Singh (2013). The puzzle was solved by Corsetti et al (2008), which develops a two-country model with an incomplete asset market that relies on the low elasticity of substitution between goods and home bias in consumption.…”

“…Rather, this model concentrates on the contribution of the capital good formation using goods from all sectors in determining relative consumption and the RER dynamics. This model used in this paper is similar to the standard two-country business cycle model of Oviedo and Singh (2013), but in which the international asset market allows only riskless bond trade. Each country produces a unique tradable and a non-traded good.…”