Title: Multiple stages of processing and the quantity anomaly in international business cycle models
Description: "We construct a  two-country DSGE model with multiple stages of processing and local-currency  staggered price-setting to study cross-country quantity correlations driven by  monetary shocks.  The model embodies a mechanism that propagates a monetary  surprise in the home country to lower the foreign price level while restraining  the home price level from rising too quickly.  It does so through reducing  material costs in terms of the foreign currency unit while dampening the upward  movements in the costs in terms of the home currency unit, both in absolute  terms and relative to the costs of primary factors.  We show that, through this  mechanism and a resulting factor substitution effect, the model is able to  generate significant cross-country quantity correlations, with correlations in  consumption considerably lower than correlations in output, as in the  data"--Federal Reserve Bank of Philadelphia web site.
Subjects: Business cycles, Econometric models, International trade, Mathematical models, Monetary policy, Open price system, Production functions (Economic theory)