Stephen McKnight
Can indeterminacy and self-fulfilling expectations help explain international business cycles? A preliminary investigation
McKnight, Stephen; Povoledo, Laura
Abstract
We introduce equilibrium indeterminacy into a two-country incomplete asset model with imperfect competition and analyze whether self-fulfilling, belief-driven fluctuations (i.e., sunspot shocks) can help resolve the major puzzles of international business cycles. We find that a combination of productivity and sunspot shocks can account for the observed counter-cyclical behavior in international relative prices and quantities, while simultaneously generating volatilities that match the data. The indeterminacy model can also resolve the Backus-Smith puzzle without requiring a low value of the trade elasticity.
Working Paper Type | Working Paper |
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Deposit Date | Dec 14, 2016 |
Publicly Available Date | Dec 14, 2016 |
Peer Reviewed | Not Peer Reviewed |
Keywords | indeterminacy, sunspots, international business cycles, net exports, terms of trade, real exchange rate, Backus-Smith puzzle |
Public URL | https://uwe-repository.worktribe.com/output/836910 |
Publisher URL | http://www1.uwe.ac.uk/bl/research/bristoleconomicanalysis/economicsworkingpapers/economicspapers2016.aspx |
Contract Date | Dec 14, 2016 |
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