the international transmission of real business cycles the authors present a stochastic model of two barter economies with production linked by free trade in goods and securities which generates pareto efficient international transmissions of business cycle disturbances each country is inhabi ted by an infinitely lived representative firm and consumer worker and is subject to country specific production shocks the internation al capital market effects perfect pooling of country specific risk c onsumption and output volatility may be higher in trade than under au tarchy as agents can be induced to undertake additional risk in exchange for a higher expected utility copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

characterizing cross country consumption correlations general equilibrium models of international fluctuations that assume complete asset markets predict that consumption will be highly correlated across countries while the data display correlations that are rather low it has become common to characterize this empirical regularity by noting that cross country consumption correlations tend to be lower than corresponding output correlations this note reconsiders that charac terization and demonstrates that it is not particularly robust it also documents a related regularity that is more pervasive consumption fluctuations are more highly correlated with domestic production than with world output this provides an alternative standard for evaluating models of international fluctuations

using ols to estimate and test for structural changes in models with endogenous regressors summary we consider the problem of estimating and testing for multiple breaks in a single equation framework with regressors that are endogenous i e correlated with the errors we show that even in the presence of endogenous regressors it is still preferable in most cases to simply estimate the break dates and test for structural change using the usual ordinary least squares ols framework except for some knife edge cases it delivers estimates of the break dates with higher precision and tests with higher power compared to those obtained using an instrumental variable iv method also the ols method avoids potential weak identification problems caused by weak instruments to illustrate the relevance of our theoretical results we consider the stability of the new keynesian hybrid phillips curve iv based methods only provide weak evidence of instability on the other hand ols based ones strongly indicate a change in 1991 q1 and that after this date the model loses all explanatory power copyright 2013 john wiley sons ltd

the dynamic behavior of the real exchange rate in sticky price models comment in an article published in the american economic review j n steinsson 2008 argues that two sticky price models driven by real shocks can explain the observed persistence volatility and hump shaped impulse response function of the real exchange rate this comment shows first that correcting an error in one of steinsson s models leads to substantially lower persistence and volatility of the real exchange rate second that steinsson s models cannot match real exchange rate volatility relative to output and third that reasonable variations of the model calibration or specification all lead to lower real exchange rate persistence and volatility or both

project evaluation by potential tax reform abstract shadow prices are derived for small open economies with several production sectors experiencing constant returns to scale small projects affect the balance of trade domestic prices of non traded goods and factors and sector scales only domestic prices affect welfare and only if there is not domestic price equalization generally a project s net benefits depend upon the potential tax and tariff reform made possible or necessary through the balance of trade effect border prices are right for traded goods but domestic good shadow pricing requires knowing the direction of at least one reversible available tax reform and presuming optimality with respect to available reforms

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

what macroeconomic risks are not shared by international investors adopting an asset market view of international risk sharing we identify various sources of macroeconomic risk faced by international investors using a structural vector autoregression model we find that most of the risks of exogenous financial market shocks are shared by international investors through the existing asset markets however other macroeconomic risks such as those associatedwith exogenousshocks to consumption growth inflationandmonetarypolicies arenot fullysharedacrosscountries this finding helps us understand the apparently contradicting perceptions of international risk sharing generated by the analysis of asset market returns versus that of aggregate consumption growth across countries jel codes e44 f31 g12

a time series analysis of representative agent models of consumption andleisure choice under uncertainty this paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and leisure is nontime separable the nonseparability of preferences accommodates intertemporal substitution or complementarity of leisure and thereby affects the comovements in aggregate compensation and hours worked these cross relations are examined empirically using postwar monthly u s data on quantities real wages and the real return on the one month treasury bill the estimated values of the parameters governing preferences differ significantly from the values assumed in several studies of real business models several possible explanations of these discrepancies are discussed

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

cost benefit criteria and the compensation principle in evaluating small projects the use of the compensation principle in cost benefit analysis as a means of separating the efficiency and distributional effects of a project is theoretically suspect for a number of reasons one difficulty is the lack of a necessary and sufficient criterion for determining that a compensation test is passed in an economy where consumers and producers prices are not the same for this paper we establish such a criterion for projects that are small in the differential sense the criterion requires the calculation of a set of shadow prices which is a weighted average of the consumers and producers price vectors

variable capital utilization and international business cycles this paper develops a two country international business cycle model with variable capital utilization using a standard depreciation in use technology variable capital utilization significantly reduces the required size of productivity shocks needed to replicate observed output volatility by 20 40 further the model generates positive comovement across countries in wages hours and investment while preserving empirically accurate predictions regarding the relative cross country correlations of output and consumption and the countercyclical behavior of net exports finally accounting for variable capital utilization reduces cross country correlation of true productivity shocks relative to that of the standard solow residual

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

the generalized theory of transfers and welfare bilateral transfers in a multilateral world paul samuelson s 1952 1954 classic papers on the transfer problem addressed two separate analytical issues the positive effect of a transfer on the terms of trade and the welfare effect of the transfer on the donor and the recipient since then a considerable body of literature has grown up on the positive analysis while samuelson 1954 himself had extended the 2 x 2 x 2 free trade analysis to allow for tariffs and transport costs subsequent writers have analyzed other extensions of the model for example to allow for nontraded goods as with leisure in samuelson 1971 or general nontraded goods in john chipman 1974 and ronald jones 1970 1975 remarkably however the welfare analysis of transfers has not paralleled these developments since wassily leontief 1936 produced an example of immiserizing transfer from abroad and samuelson 1947 argued that the example required market instability the proposition that has monopolized attention has been that a transfer in the conventional 2 x 2 x 2 model in its free trade version cannot immiserize the recipient or enrich the donor as long as world markets are stable in the walras sense interestingly samuelson 1954 who did extend the positive analysis to include tariffs did not go on to ask whether immiserization of the transfer recipient and hence symmetrically enrichment of the donor in a two country model could now arise consistent with market stability recently the welfare analysis of transfers has been extended in two different directions both apparently unconnected and both yielding the conclusion that transfers from abroad can be immiserizing and that the donor may improve its welfare despite market stability one route to this conclusion has been the introduction of a third economic agent or country that is outside of the transfer process in the appendix of his 1960 paper analyzing the interaction between trade policy and income distribution harry johnson discussed the possibility of welfareparadoxical redistribution between two factor income classes capital and labor in an open economy thereby providing what can be interpreted as a treatment of the threeagent transfer problem for the case in which donor and recipient are both completely specialized in the ownership of a single different factor an independent analysis of the three agent transfer problem using a restrictive model with given endowments of goods and fixed coefficients in consumption was also undertaken in an important paper by david gale 1974 2 brecher and bhagwati bhagwati department of economics columbia university new york ny 10027 brecher department of economics carleton university ottawa on kis 5b6 hatta department of political economy the johns hopkins university baltimore md 21218 we thank the national science foundation grant no 524718 for partial financial support of the research underlying this paper the paper was written when brecher and hatta were visiting columbia university 1981 82 gratefully acknowledged are helpful comments and suggestions from john chipman avinash dixit jacques dreze robert feenstra jacob frenkel ronald jones murray kemp andreu mas colell michael mussa john riley lars svensson and robert willig from anonymous referees and from seminar participants at berkeley harvard minnesota rochester chicago and the university of california los angeles after the present paper was submitted for publication and following its presentation at rochester our attention was drawn to this appendix which was noticed by a student of ronald jones subsequently we learned from makoto yano that motoshige itoh had pointed out an important related paper by ryuotaro komiya and t shizuki 1967 whose condition 11 for the johnson case anticipated our equation 12 below we are grateful for having both of these references brought to our attention 2 gale constructs an example in which the donor is enriched along with the recipient furthermore this immediately implies that a reverse transfer will immis

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

labor market frictions investment and capital flows the standard neoclassical model predicts that countries with higher productivity growth rates experience sharp increases in investment that are followed by rapid declines this monotonic investment response contrasts with the empirical evidence that suggests a rather hump shaped investment behavior in this paper i present a two country general equilibrium model that generates hump shaped investment responses from labor market frictions in the model i decompose investment into tradable and non tradable components and show that an increase in the growth rate of a country results in scarcities of the non tradable components which raise the relative price of investment goods these scarcities occur because labor is unable to reallocate quickly between sectors within economies this mechanism has two main implications first the induced movement in relative prices equates cross country returns to capital and thus greatly reduces initial investment second domestic saving now plays a more important role in financing investment inducing a co movement between these variables

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

robust monetary policy structural breaks and nonlinearities in the reaction function of the central bank of brazil abstract in this work we seek to investigate the existence of nonlinearities in the reaction function of the central bank of brazil arising from this policymaker s uncertainties about the effects of the output gap on inflation theoretically we follow tillmann 2011 to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output inflation trade off of the phillips curve in addition we perform structural break tests to assess possible changes in the conduct of the brazilian monetary policy during the inflation targeting regime the results indicate that i the uncertainties about the slope in the phillips curve implied nonlinearities in the central bank of brazil s reaction function ii we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003 iii there was an increase in the response of the selic rate to output gap and a weaker response to the current inflation gap in meirelles tombini s administration and iv the central bank of brazil has also reacted to the exchange rate in meirelles tombini s administration

the measurement of waste in a public goods economy abstract a small open economy model is developed to measure the waste of the whole economy when levels of public goods are determined by the government the allais debreu diewert measure of waste is defined and its second order approximation is calculated this measure utilizes the second order substitution matrices of the restricted profit function and the restricted expenditure function evaluated at an equilibrium finally simple examples and diagrams are utilized to clarify the economic implications of our approach

the measurement of the benefits of public inputs with distortionary taxation this paper derives formulae that show the marginal benefits of public inputs in second best economies with tax distortions the values of the change in the aggregate net output vector and in some cases the change of profit income evaluated at appropriate shadow prices show their marginal benefits these shadow prices depend on which taxation scheme you can perturb when the amount of a public input is increased the author considers the three cases where he can change 1 all indirect tax rates and all corporate income tax rates 2 all lump sum transfers and 3 some part of indirect tax rates

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

explaining saving investment correlations national saving and investment rates are highly positively correlated in virtually all countries this is puzzling as it apparently implies a low degree of international capital mobility this paper shows that the observed positive correlation between national saving and investment rates arises naturally within a quantitatively restricted equilibrium model with perfect mobility of financial and physical capital the model is consistent with the fact that saving investment correlations are larger for larger countries but are still substantial for small countries further the model is consistent with the finding that current account deficits tend to be associated with investment booms copyright 1993 by american economic association

international business cycles with endogenous incomplete markets backus kehoe and kydland 1992 baxter and crucini 1995 and stockman and tesar 1995 find two major discrepancies between standard international business cycle models with complete markets and the data in the models cross country correlations are much higher for consumption than for output while in the data the opposite is true and cross country correlations of employment and investment are negative while in the data they are positive this paper introduces a friction into a standard model that helps resolve these anomalies the friction is that international loans are imperfectly enforceable any country can renege on its debts and suffer the consequences for future borrowing to solve for equilibrium in this economy with endogenous incomplete markets the methods of marcet and marimon 1999 are extended incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded

large versus small foreign exchange interventions abstract we use non temporal threshold analysis to investigate the exchange rate effects of large versus small interventions more than two decades of official daily data on intervention in the jpy usd market facilitate our analysis we find no evidence that small interventions exert a discernible influence on the exchange rate while large interventions significantly influence the exchange rate in the theoretically consistent manner we conclude that small interventions may not be considered a determinant of the exchange rate while large interventions constitute an important element in our understanding and modeling of the exchange rate

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

dynamic risksharing in the united states and europe abstract we use a panel var model to improve upon the existing methodologies to analyze interregional risksharing and consumption smoothing channels first we endogenize the output process within a more general multi equation framework capturing the dynamic feedback between output and various smoothing channels second in line with dynamic general equilibrium open economy models of risksharing we exploit impulse response functions to trace the role of each smoothing channel over time in the presence of different structural shocks temporary vs permanent and output vs smoothing channels in the application to the us and oecd countries we find different dynamic properties of different smoothing channels we compare our results with the predictions of standard risksharing and consumption theories and tackle some of the puzzles in the literature such as the international risksharing puzzle and the consumption output correlation puzzle we are also able to address such policy issues as whether fiscal stabilizers have been substitutes or complements for financial market diversification activities and whether further financial market integration is likely to provide countries with more shock absorption tools a key result is the strong substitutability between capital and credit smoothing in the us and between fiscal and credit smoothing in the oecd

methodological and empirical issues in real business cycle theory abstract in this paper we argue that the major impact of the rbc literature has been to propose a new methodology for macroeconomics this methodology is distinguished first by the importance it attributes to the empirical description of the phenomena to be explained and second by the use of this description in conjunction with quantitative theorizing i e the construction of computable general equilibrium models whose characteristic statistics match those of the data in accordance with this approach we first report on the current state of knowledge concerning business cycle regularities and conclude that additional empirical effort is called for in order to arrive at the appropriate basis for theorizing we then examine the performance of existing models and evaluate the case for integrating monetary factors and demand shocks into them lastly we review the recent efforts to explain the employment variability puzzle and argue that the search for a solution naturally leads to the incorporation of significant non walrasian features into the rbc framework

demand shocks and open economy puzzles 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

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

consistency of the least squares estimator in threshold regression with endogeneity this paper shows that when the threshold variable is independent of other covariates such as in the structural change model the least squares estimator of the threshold point is consistent even if endogeneity is present

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

a spectral analysis of the cross country consumption correlation puzzle dynamic general equilibrium models predict high cross country consumption correlations whereas the data show that output correlations tend to be higher spectral decomposition reveals that this ranking varies across frequency bands with consumption correlations often exceeding output correlations at higher frequencies

inconsistency of 2sls estimators in threshold regression with endogeneity abstract this paper shows the inconsistency of three forms of 2sls estimators to illustrate the specialty of the endogeneity problem in threshold regression

robust control informational frictions and international consumption correlations abstract in this paper we examine the effects of model misspecification robustness or rb on international consumption correlations in an otherwise standard small open economy model with endogenous capital accumulation we show that in the presence of capital mobility in financial markets rb lowers the international consumption correlations by generating heterogeneous responses of consumption to productivity shocks across countries facing different macroeconomic uncertainty in addition we show that rb can also improve the model s predictions in three other moments of consumption dynamics the relative volatility of consumption to income the persistence of consumption and the correlation between consumption and output after calibrating the rb parameter using the detection error probabilities we show that the model can explain the observed international consumption correlations as well as the other consumption moments quantitatively finally we show that the main conclusions of our benchmark model do not change in an extension in which the agent cannot observe the state perfectly due to finite information processing capacity

value added trade and business cycle synchronization ever since frankel and rose s 1998 seminal paper the literature on trade and business cycle synchronization has relied on gross trade data with weak results in recent papers that carefully address omitted variable bias this paper re examines this relationship using new value added trade data for 63 advanced and emerging economies during 1995 2013 in a panel framework we identify a significantly positive impact of bilateral value added trade intensity on business cycle synchronization controlling for global common shocks country pair heterogeneity and other covariates that is absent when gross trade data are used there is also some evidence that the impact of value added trade on synchronization increases with the degree of value added intra industry trade we provide a theoretical rationale for the role of value added trade for synchronization using a simple international business cycle model that features cross country input linkages in production

savings investment and international capital flows abstract the high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile this paper surveys the theory and evidence on the relationship between savings and investment in a sample of 23 oecd countries a positive correlation between savings and investment rates is found in both the short and long runs however a wide variety of models generate such co movements in savings and investment in response to exogenous disturbances even under conditions of complete financial markets thus the savings investment correlation provides little evidence on the question of international capital mobility

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve

realistic cross country consumption correlations in a two country equilibrium business cycle model abstract a well known feature of one good multi agent arrow debreu economies with edentical additively separable homothetic preferences is that the consumptions of all agents are perfectly correlated such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross country correlations of aggregate consumption this paper provides an example of a two country real business cycle model in which preferences are not separable between consumption and labor supply the model has a simple closed form solution closed form solution and allows for fluctuations in labor supply in equilibrium moreover it generates correlations between national consumption rates which are close to some of those observed in historical data jel f41

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets