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1 Working Paper Series North-South Business Cycles Michael A. Kouparitsas Working Papers Series Research Department WP-96-9 Federal Reserve Bank of Chicago

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9 f S " w 3j S 3wS 'f 2 r rw k 3w 3k

10 *j 2 + 3*j 3*j r 2 2 rw 2 2 3w & & & & & &

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13 2? & 2 2 2& n n? 2? r 2r

14 S S 9

15 2. & & & & & & : 4 l4 l4

16 > >2 r 2r? 2? & r 2 2 2

17 H L7? L7? 2 2 L7? L7 r6 r ;

22 %r 6r %r r 2? %r2 2r 2? %r 6r %r r 2? 2r 2? %r *j 2 + 3*j 3*j

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30 J J J J

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33 f " 'f 3j w S 3wS 3j 2 ' 2 ' Ç r n r 2 ' Ç Ç r r r n 2 ' & r 2 ' & & & n 6 r 6 6 n e 3*j > 3*j > 2 e2 3*j > *j >2 2 3*j > 3*j > rw 2 2 rk K rw rk 2 + 3*j 2 + r3*j 3*j 2 2 & 2& 2 K n r r 2 r Ç Ç & &

34 2 2 e e2 K S wse3j3 E3wSE3j e2 S wse3j E3wSE3j3 Ç Ç r r K rw 3 rk Ç r rw 23 2 r3w 2 2 Ç 2 r K rw rk 3 & r rw 2 2 r3w 2 2 &2 2 K 2 + 3*j 2 + r3*j 3 3*j + 3*j 2 2 r K 2 + 3*j 2 + r3*j 3 3*j + r3*j 6 & & r e2 6 6 e

35 e 3*j > 3*j > 3 3*j > 3*j > K e 3*j > 3*j > 3*j > 3 3*j > K & 2 e2 2 3*j > *j >2 3 3*j > *j >2 2 K 2 2 e2 2 3*j > *j >2 3 3*j > *j >2 2 K 2& 2 ' Ç r n r & r 6 r e 3*j > 3*j > 3*j > 6 e2 2 3*j > *j >2 3*j > rw 2 2 rk 2 2 2

36 r n Ç n r n Ç n Ç Ç n n n & n & n & n 6 n 6 n K n3 K K Ç Ç r r r n & & & n 6 6 n K rw rk 2 + 3*j 2 + r3*j 2 2 & 2& 2 K n 3*j f <" & n f K n <" Ç Ç Ç & & & &

37 K K? r n? n r n K? n K? Kr n Kr K & & K? K K? n K? r n Kr r r rw r rk r 2r + 3*j 2r + r3*j r 3*j r r r 2r 2r? r 2? 2r K? n K? r n 2? 2?

39 C. Country lists C. Northern and Southern regions C.. Southern countries Low-income countries Benin Burkina Faso Central African Republic Egypt Ethiopia Gambia The Ghana Guyana Haiti Honduras Middle-income countries Argentina Barbados Bolivia Botswana Brazil Cameroon Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Fiji C..2. Northern Countries Australia Austria Canada Cyprus Denmark Finland France Germany India Kenya Lesotho Madagascar Malawi Mali Mauritania Nepal Niger Pakistan Greece Guatemala Jamaica Jordan Korea Republic of Malaysia Malta Mauritius Mexico Morocco Nicaragua Panama Papua New Guinea Hong Kong Iceland Ireland Israel Italy Japan Netherlands New Zealand Rwanda Sierra Leone Somalia Sudan Tanzania Togo Uganda Zaire Zambia Paraguay Peru Philippines Portugal Senegal South Africa Syrian Arab Republic Thailand Tunisia Turkey Uruguay Zimbabwe Norway Singapore Spain Sweden Switzerland United Kingdom United States

40 Table : Regional business cycle correlations Variable Correlation with same variable in South at t+j j= - j= j= + Northern variable at t Gross Domestic Product GDP Primary Output Manufacturing Output Consumption Investment Data Gross Domestic Product GDP.22 North-South model.52.5 Primary Output Manufacturing Output Consumption Investment Labor Hours Notes: Items in the data rows report the author s calculations based on data from World Bank 99. Values in parentheses are GMM standard errors using a QS kernel. The model rows report averages over simulations of 8 quarters 2 years for the North-South model. Actual and model data are Hodrick and Prescott 98 filtered with a smoothing parameter of. Quantity data are logged prior to filtering. See appendix A for a detailed description of the data and appendix C for a listing of countries by region.

41 Table 2: International correlations Correlation with: Northern GDP Primary Manufacturing NX / GDP Northern GDP Northern Real Northern Terms of Commodity NX/GDP Trade Price Data North-South Model Correlation with: Southern GDP Primary Manufacturing NX / GDP Southern GDP Southern Real Southern Terms of Commodity NX/GDP Trade Price Data North-South Model Primary Primary Manufacturing Manufacturing NX / GDP NX / GDP Notes: Items in the shaded rows report the author s calculations based on data from World Bank 99. Values in parentheses are GMM standard errors using a QS kernel. The unshaded rows report averages over simulations of 8 quarters 2 years for the North-South model. Actual and model data are Hodrick and Prescott 98 filtered with a smoothing parameter of. Quantity and price ratios are logged prior to filtering. Real Commodity Price = ratio of world primary goods price to world manufactured goods price. Terms of trade = ratio of non-fuel export prices to non-fuel import prices. See appendix A for a detailed description of the data and appendix C for a listing of countries by region.

42 Table 3: North-South business cycle volatility Variable Percentage Standard Deviation from Trend North South Data Model Data Model Gross Domestic Product GDP Primary Output Manufacturing Output Consumption Investment Labor Hours Non-Fuel Net Exports / GDP Non-Fuel Terms of Trade px/pm Real Commodity Price p/p Notes: Items in the data columns report the author s calculations based on data from World Bank 99. Values in parentheses are GMM standard errors using a QS kernel. The remaining columns report averages over simulations of 8 quarters 2 years for the North-South model. Actual and model data are Hodrick and Prescott 98 filtered with a smoothing parameter of. Quantity and price ratios are logged prior to filtering. Real commodity price=ratio of world primary goods price to world manufactred goods price. Non-fuel terms of trade = ratio of non-fuel export prices to non-fuel import prices. See appendix A for a detailed description of the data and appendix C for a listing of countries by region.

43 Table 4: Within-region business cycle correlations Correlation with: Correlation with: Pri Man Con Inv Data Northern Southern GDP GDP Primary Primary Manufacturing.8.89 Manufacturing.4.6 Consumption.82 Consumption. Pri..26 Man Con Data Inv Northern GDP.42 North-South Model Southern GDP.54 North-South Model Primary Primary Manufacturing Manufacturing Consumption.96 Consumption.95 Notes: Items in the data rows report the author s calculations based on data from World Bank 99. Values in parentheses are GMM standard errors using a QS kernel. The model rows report averages over simulations of 8 quarters 2 years for the North-South model. Actual and model data are Hodrick and Prescott 98 filtered with a smoothing parameter of. Quantity are logged prior to filtering. See appendix A for a detailed description of the data and appendix C for a listing of countries by region.

44 Table 5: Benchmark parameters Parameter Preferences β σ Ν North South Global Production δ Primary sector θ α i/k/φnφ N s N/N /φνφ Ν Manufacturing sector σ ε θ2 ωy consistent with value-added cost share: i/k/φnφ N s N/N /φ φ Ν Ν Trade Primary σ µ ω consistent with imports/total domestic usage share: Manufacturing σ µ2 ω2 consistent with imports/total domestic usage share:

45 Table 6: Actual and model steady state shares North South Variable Data Model Data Model Production-Domestic share Output gross domestic product.... Primary value-added Manufacturing value-added Production-World share Output gross domestic product Primary value-added Manufacturing value-added Labor-Sectoral share Primary.3.3 Manufacturing Investment-Sectoral share Primary.6.25 Manufacturing Expenditure-Share of GDP Consumption Investment Exports Imports Trade-Export shares Primary Manufacturing Notes: Author=s calculations based on data from World Bank 99 and United Nations 992 Tables 6.3 and 6.4.

46 Table 7: Variance Decomposition Bounds Source of Innovation: Variable Northern Gross Domestic Product GDP Primary Output Manufacturing Output Consumption Capital Investment A. Both regions productivity shocks Primary Manufacturing B. Northern Productivity Shocks Primary Manufacturing Southern Gross Domestic Product GDP Primary Output Manufacturing Output Consumption Capital Investment Non-Fuel Net Exports / GDP Non-Fuel Terms of Trade px/pm Real Commodity Price p/p Notes: Each cell indicates the share the variable s variance explained by the selected productivity shocks. The first value indicates the lower bound of these variance decomposition exercises while the second value indictaes the upper bound. Note that primary sector innovations are orthogonal to the manufacturing innovations

47 Figure : North-South Business Cycles Percentage Deviation From Trend A. Northern vs. Southern GDP Northt Southt+ ρ =.68.3 Percentage Deviation From Trend B. Northern vs. Southern manufacturing Northt Southt+ ρ = C. Northern vs. Southern consumption D. Northern vs. Southern investment Percentage Deviation From Trend Northt Southt+ ρ = Percentage Deviation From Trend ρ = Northt Southt E. Real commodity price vs. manufacturing F. Real commodity price vs. primary Percentage Deviation From Trend ρ = Real Commodity Price RHS -3 ManufacturingLHS Percentage Deviation From Trend Real Commodity Price RHS Primary LHS -3 ρ = Notes: Author s calculations based on data from World Bank 99. Unbracketed values reported in the chart are correlation coefficients. Values in parentheses are GMM standard errors using a QS kernel. Data are Hodrick and Prescott 98 filtered with a smoothing parameter of. Quantity and price ratios are logged prior to filtering. Real commodity price = ratio of world primary goods price to world manufactured goods price. See appendix A for a detailed description of the data and appendix C for a listing of countries by region.

48 Figure 2: The effects of a % shock to Northern manufacturing productivity Percentage Deviation from Steady State Deviation from Steady State Percentage Deviation from Steady State Percentage Deviation from Steady State Northern output response Manufacturing Value-Added Primary Aggregate GDP Number of Quarters After Shock Northern expenditure response Aggregate Consumption Number of Quarters After Shock Northern labor response Labor Hours Aggregate Capital Investment Real Wage Number of Quarters After Shock Southern trade ratios Bonds/Y* Net Exports/GDP* Number of Quarters After Shock Percentage Deviation from Steady State Percentage Deviation from Steady State Percentage Deviation from Steady State Percentage Deviation from Steady State Southern output response Aggregate GDP Manufacturing Value-Added Primary Number of Quarters After Shock Southern expenditure response Aggregate Capital Investment Number of Quarters After Shock Southern labor response Labor Hours Southern trade volumes and prices Real commodity price p/p2 Imports Aggregate Consumption Number of Quarters After Shock Terms of Trade px/pm Exports Real Wage Number of Quarters After Shock

49 Figure 3: The effects of a % shock to Southern primary productivity Percentage Deviation from Steady State Percentage Deviation from Steady State Northern output response Manufacturing Value-Added Aggregate GDP Primary Number of Quarters After Shock Northern expenditure response Aggregate Consumption Aggregate Capital Investment Number of Quarters After Shock Percentage Deviation from Steady State Percentage Deviation from Steady State Southern output response Manufacturing Value-Added Primary Aggregate GDP Number of Quarters After Shock Southern expenditure response Aggregate Consumption Aggregate Capital Investment Number of Quarters After Shock Percentage Deviation from Steady State Deviation from Steady State Northern labor response Labor Hours Real Wage Number of Quarters After Shock Southern trade ratios Net Exports/GDP* Bonds/Y* Number of Quarters After Shock Percentage Deviation from Steady State Percentage Deviation from Steady State Southern labor response Real Wage Labor Hours Number of Quarters After Shock Southern trade volumes and prices Real commodity price p/p2 Exports Imports Terms of Trade px/pm Number of Quarters After Shock

50 Figure 4: The effects of varying the elasticity of substitution between manufacturing inputs North-South Correlation A. Correlations Manufacturing Value-Added Consumption Gross Domestic Product Manufacturing Productivity Shock Elasticity of Substitution Figure 5: The effects of varying the elasticity of substitution between Northern and Southern manufactured goods North-South Correlation A. Correlations Consumption Gross Domestic Product Manufacturing Productivity Shock Manufacturing Value-Added Elasticity of Substitution 6 B. Standard Deviations 7 B. Standard Deviations Percentage Standard Deviation Real commodity price p/p2 Terms of Trade px/pm Percentage Standard Deviation Terms of Trade px/pm Relative price of manufactures p2s/p2n Elasticity of Substitution Elasticity of Substitution Figure 6: The effects of varying the cross-region correlation of non-primary innovations A. Correlations Consumption Figure 7: The effects of varying the primary sector labor adjustment elasticity A. Correlations North-South Correlation Gross Domestic Product Manufacturing Productivity Shock Manufacturing Value-Added Manufacturing Productivity Correlation Sectoral Correlation.8 Southern Sectoral Output Correlation Northern Sectoral Output Correlation Primary Labor Adjustment Elasticity Percentage Standard Deviation B. Standard Deviations Terms of Trade px/pm 2 Relative price of manufactures p2s/p2n Manufacturing Productivity Correlation Percentage Standard Deviation B. Standard Deviations Real commodity price p/p2 Terms of Trade px/pm Primary Labor Adjustment Elasticity

Argentina Bahamas Barbados Bermuda Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile

Argentina Bahamas Barbados Bermuda Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile Americas Argentina (Banking and finance; Capital markets: Debt; Capital markets: Equity; M&A; Project Bahamas (Financial and corporate) Barbados (Financial and corporate) Bermuda (Financial and corporate)