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International business cycles and the dynamics of the current account

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We analyse the transmission of shocks across countries and how the reponses of investment and the current account differ depending on the degree of propagation of shocks. We explore both issues by estimating a structural model for the Japanese, German and US economies where productivity shocks propagate through trade. There is a strong asymmetry in the propagation of shocks. Shocks to the US propagate quickly to the other two economies while German and Japanese shocks have little impact in other countries' productivity. When we explore the responses of investment and the current account to each of the shocks we find that productivity increases lead to domestic investment booms and current account deficits and that foreign investment tends to react positively to productivity shocks, even when the shock is purely national. We also find quantitative differences among the 3 countries in the behavior that their current account and investment growth rates show in response to domestic productivity changes

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/Inseadwp1995/95-55.pdf

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Copyright INSEAD. All rights reserved