Working Paper: CEPR ID: DP6520
Authors: Nir Jaimovich; Sergio Rebelo
Abstract: It is well known that the neoclassical model does not generate comovement among macroeconomic aggregates in response to news about future total factor productivity. We show that this problem is generally more severe in open economy versions of the neoclassical model. We present an open economy model that generates comovement both in response to sudden stops and to news about future productivity and investment-specific technical change. We find that comovement is easier to generate in the presence of weak short-run wealth effects on the labour supply, adjustment costs to labour, and/or investment, and whenever the real interest rate faced by the economy rises with the level of net foreign debt.
Keywords: comovement; news; open economy
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news about future total factor productivity (TFP) (O49) | comovement among macroeconomic aggregates (E10) |
| investment-specific shocks (E22) | comovement among macroeconomic aggregates (E10) |
| sudden stops (F32) | comovement among macroeconomic aggregates (E10) |
| weak short-run wealth effects on labor supply (H31) | comovement among macroeconomic aggregates (E10) |
| adjustment costs to labor or investment (J30) | comovement among macroeconomic aggregates (E10) |
| real interest rate rises with the level of net foreign debt (F34) | comovement among macroeconomic aggregates (E10) |
| positive news shocks (G14) | larger fall in hours worked in open economy (F41) |
| positive news shocks (G14) | larger fall in output in open economy (F41) |
| absence of intertemporal substitution effects in labor supply (J22) | larger fall in hours worked in open economy (F41) |
| absence of intertemporal substitution effects in labor supply (J22) | larger fall in output in open economy (F41) |