Working Paper: CEPR ID: DP3382
Authors: Alejandro Cuat; Marco Maffezzoli
Abstract: This Paper introduces Heckscher-Ohlin trade features into a two-country DSGE model, and studies how productivity shocks propagate through trade in goods. In comparison with standard models, the business cycle properties of our framework are broadly compatible with the empirical evidence. Moreover, the model yields some novel predictions that distinguish it from the existing international real business cycle literature: (1) transitory shocks to productivity have permanent effects on country-level aggregate variables; (2) aggregate productivity shocks have relevant effects on the sectoral allocation of production factors; (3) under complete asset markets, the international correlation of consumption is lower than that of output; (4) the model?s predictions on the correlation of the terms of trade with the main aggregate variables are compatible with the data.
Keywords: business cycles; Heckscher-Ohlin; international trade; productivity shocks
JEL Codes: E32; F11; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transitory shock to productivity (O49) | Permanent effects on aggregate variables (E19) |
| Aggregate productivity shocks (O49) | Sectoral allocation of production factors (D24) |
| Complete asset markets (G19) | International correlation of consumption lower than GDP (F62) |
| Terms of trade (F14) | GDP correlation varies by country (O57) |
| Terms of trade (F14) | Less volatility than real exchange rate (F31) |