Tastes and Technology in A Two-Country Model of the Business Cycle: Explaining International Co-Movements

This paper develops a two-country real business cycle model and confronts it with an extensive set of empirical observations. In particular, we examine the model’s consistency with the behavior of international as well as domestic variables, the cyclical behavior of relative prices and the model’s implications for economic aggregates at the sectoral level. This line of research is motivated by a desire to understand the international transmission of business cycles and changes in international competitiveness as reflected in the behavior of relative prices, such as real exchange rates and the terms of trade. We also hope to extend our understanding of business cycles in closed economies by studying a broader and different set of observations.