Demand Shocks and Open Economy Puzzles
- (pp. 644-49)
Abstract
We pose good markets frictions on top of an otherwise standard two-country international real business cycle (IRBC) model. Shopping for goods takes effort, which prevents perfect matching between customers and producers. An increase in search effort implies increased measured productivity. Demand shocks increase expenditures and search effort simultaneously increasing output, consumption, productivity, and the trade deficit and appreciating the real exchange rate. Thus we solve the Backus-Smith puzzle and we show that the cross country correlation of consumption is higher than that of output. Standard IRBC models cannot account for these puzzles along with movements in TFP.Citation
Bai, Yan, and José-Víctor Ríos-Rull. 2015. "Demand Shocks and Open Economy Puzzles." American Economic Review, 105 (5): 644-49. DOI: 10.1257/aer.p20151121Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E32 Business Fluctuations; Cycles
- F41 Open Economy Macroeconomics
- F44 International Business Cycles