- Publications de la Banque centrale européenne
News shocks, real exchange rates and international co-movements
Numéro | 83 |
Date | July 2013 |
Auteur | Kyriacos Lambrias |
Résumé | We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The model features non-tradable goods, zero wealth effects on labour supply, imperfect substitutability of capital across sectors and variable capacity utilisation. The latter can generate strong Balassa-Samuelson effects that drive a low consumption-real exchange rate correlation. Cyclical movements across countries are also positively correlated. The novelty of our paper is to introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through the wealth effects of future changes in income, while being consistent with expectations-driven economic expansions. Keywords: News-Driven Cycles, Backus-Smith Puzzle, Real-Exchange Rates JEL Classiffication: F41, F44 |
Téléchargement | Cahier d'étude 83 (pdf, 2 MByte) |