Common Trade Exposure and Business Cycle Comovement

A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data.

Common Trade Exposure and Business Cycle Comovement

A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data.

A Business Cycle Model with Capital

We a real business cycle model with money and show how to compute the equilibrium outcomes using linearization methods. We illustrate the quantitative implications of our model by developing a Dynare computer code version of the model.

A Real-business-cycle Model with a Stochastic Capital Share: Lessons for Bulgaria (1999–2018)

We allow for a stochastic capital share into a real-business-cycle setup with a government sector. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2018). We investigate the quantitative importance of the variability in capital share for cyclical fluctuations in Bulgaria. In particular, allowing for a stochastic capital share in the model increases variability of investment and employment, at the cost of decreasing the volatility of wages, and causing employment to become countercyclical. JEL Classification: E24, E32

The Role of Energy in a Real Business Cycle Model with an Endogenous Capital Utilization Rate in a Government Sector: Lessons from Bulgaria (1999–2016)

We introduce a pro-cyclical endogenous utilization rate of physical capital stock into a real business cycle model augmented with a government sector in detail. We calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999–2016). We investigate the quantitative importance of the endogenous depreciation rate and the capital utilization mechanism working through the use of energy for cyclical fluctuations in Bulgaria. In particular, a positive shock to energy prices in the model works like a negative technological shock. Allowing for variations in factor utilization and the presence of energy as a factor of production improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework with constant depreciation and a fixed utilization rate of physical capital (e.g., Vasilev (2009)).

An Empirical Study of Taiwan’s Real Business Cycle

We study the characteristics of the real business cycle and the sources of the economic fluctuation in Taiwan over the last forty years, when it experienced both developing and developed stages of the economy, by considering a small open economy real business cycle model with financial friction. In particular, the breaking time point that distinguishes between developing and developed stages of the economy in Taiwan is chosen on the basis of the International Monetary Fund (IMF). We use a Bayesian approach to obtain the posterior densities for the structural parameters of interest. Conditioning on the Bayesian point estimates, the posterior mean in particular, we generate a set of statistical moments and related statistics that characterize the features and sources of the real business cycle. We find that a real business cycle model with financial friction explains the features of real business cycle in a developing stage of Taiwan’s economy well. However, the results it provides are unsatisfactory for matching the characteristics of real business cycle in a developed stage of Taiwan’s economy. In addition, the technology shock explains a large fraction of the economic fluctuation, particularly in real output, consumption and investment. More precisely, permanent technology shock explains a larger fraction of the economic fluctuation than a transitory technology shock.

The Analysis of Real Business Cycle Model with the Use of Bayesian VEC Type Models

In many economic theories and models, both long- and short-run relationships between variables are in focus. It is also the case in the real business cycle model (RBC model). The main aim of the paper is empirical analysis of the basic, three-variable RBC model for the Polish data of product, private consumption and investment over the years 1995–2015. A group of Bayesian VEC models with additional short-term restrictions is employed in this research. The Bayesian model comparison leads to the conclusion that the analyzed process is driven by two stochastic trends and one common cycle. Additionally, in order to evaluate the importance of long- and short-run shocks, the forecast error variance decomposition and the impulse response functions are calculated.