Working Paper: NBER ID: w15123
Authors: Espen Henriksen; Finn E. Kydland; Roman Sustek
Abstract: Cyclical fluctuations in nominal variables--aggregate price levels and nominal interest rates--are documented to be substantially more synchronized across countries than cyclical fluctuations in real output. A transparent mechanism that can account for this striking feature of the nominal environment is highlighted. It is based on (small) cross-country spillovers of shocks and an interaction between Taylor rules and no-arbitrage conditions. The mechanism is quantitatively important for a wide range of plausible parameterizations and is found to be robust to modifications of the economic environment that help account for other important features of domestic and international aggregate fluctuations.
Keywords: nominal fluctuations; monetary policy; international business cycles
JEL Codes: E31; E32; E43; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in nominal variables (E39) | synchronization of nominal fluctuations across countries (F44) |
| cross-country spillovers of shocks (F44) | synchronization of nominal fluctuations across countries (F44) |
| interaction between Taylor rules and no-arbitrage conditions (E43) | synchronization of nominal fluctuations across countries (F44) |
| domestic monetary policy (E52) | control of nominal variables (E64) |
| domestic monetary policy (E52) | synchronization of nominal fluctuations across countries (F44) |
| technology shocks (D89) | nominal variables (C29) |
| nominal interest rates (E43) | synchronization of nominal fluctuations across countries (F44) |
| aggregate price levels (E30) | synchronization of nominal fluctuations across countries (F44) |