Explaining International Business Cycle Synchronization

Transcription

1 1 Explaining Inernaional Business Cycle Synchronizaion Rober Kollmann European Cenre for Advanced Research in Economics and Saisics (ECARES), Universié Libre de Bruxelles & CEPR

2 World business cycle : High cross-counry correlaions of GDP, Labor hours, invesmen 2 Sandard macro models canno explain his! Predic weak (or negaive) ransmission of counry-specific shocks o foreign real aciviy Prediced cross-counry correlaions of GDP, I, Labor MUCH smaller han empirical correlaions Inernaional correlaion puzzle Key challenge for (inerna.) macro E.g. Backus, Kehoe & Kydland (1992, 1994)

3 Observed high cross-counry correlaions CANNOT solely be driven by worldwide (common) shocks. Measured shocks are less correlaed across counries han GDP 3 Business cycle synchronizaion mus reflec synchronized endogenous domesic & foreign responses o counry-specific shocks. Problem: exising models do NOT generae srong endogenous inerna. shock ransmission

4 4 This paper: soluion of inerna. correlaion puzzle Simple DSGE model in which counry-specific TFP shocks induce posiively correlaed responses of domesic & foreign real aciviy realisic cross-counry correlaions of real aciviy Also: volaile real exchange rae

5 5 THE MODEL Simple wo-counry (Home, Foreign) srucure inspired by sandard Inernaional RBC model: Backus, Kehoe and Kydland, 1994 [BKK] 2 raded goods Each counry produces 1 raded good using domesic capial & labor (immobile) Local spending bias Complee financial markes Exogenous TFP shocks

6 Model DIFFERS from sandard open econ models in 2 KEY ASSUMPTIONS shown o joinly generae srong cross-counry correlaions: 6 I) Recursive ineremporal preferences Epsein, Zin, Weil [EZW]: VERY widely used in asse pricing; no much used in in l macro II) Low wealh effec on labor supply Greenwood, Hercowiz & Huffman (1988) [GHH] period uiliy: zero wealh effec on labor supply. Rigid wage (workers off desired labor supply; labor hours deermined by firms labor demand) IMPORTANT: I) & II) are JOINTLY needed for solving inernaional correlaion puzzle

7 Sandard open econ. models: 7 I) Time-separable preferences II) King, Plosser & Rebelo [KPR] period uiliy: srong negaive wealh effec on labor supply (leisure a normal good)

8 Inuiion: Consider persisen rise in Home TFP 8 To explain why Home TFP have o explain why Home TFP Foreign GDP Foreign Labor Terms of rade are key ransmission channel: Home TFP Home real exchange rae (RER) depreciaes Home erms of rade (.o..) Foreign.o.. Posiive effec on Foreign Labor DEMAND Posiive subsiuion effec & negaive wealh effec on Foreign Labor SUPPLY

9 9 Foreign L if : STRONG effec on Foreign Labor DEMAND STRONG SUBSTITUTION effec on Foreign Labor SUPPLY WEAK WEALTH effec on Labor SUPPLY In sandard macro models (ime-separable preferences & KPR period uiliy): weak erms of rade (.o..) & RER response o TFP shocks wealh & subsiuion effecs of.o.. changes off-se each oher risk-sharing wealh ransfer (Home o Foreign) reduces Foreign hours (under KPR uiliy) weak (perhaps even negaive) response of Foreign GDP o Home produciviy increase

10 10 Why can model here generae inerna. comovemen? Wih recursive preferences: Home TFP riggers STRONGER Foreign RER APPRECIATION & Foreign erms of rade (.o..) IMPROVEMENT Wih weak wealh effec on labor supply: Sronger Foreign.o.. Thus Home TFP Foreign labor Home & Foreign GDP HOME & FOREIGN GDP, HOURS, INVESTMENT COMOVE POSITIVELY

11 Role of Recursive preferences: make RER more responsive o persisen shocks Recursive preferences: coefficien of risk aversion (CRA) inverse of ineremporal elasiciy of subsiuion (IES) CRUCIAL: When CRA 1/IES: household s Ineremporal Marginal Rae of Subsiuion (IMRS) depends on (fuure) life-ime uiliy IMRS is volaile when shocks are persisen [This is why EZW is so popular in asse pricing!] 11

12 12 Common assumpion: CRA > 1/IES increase in lifeime uiliy LOWERS IMRS. If Home produciviy increase Home life-ime uiliy Home IMRS Complee markes: Efficien risk sharing IMRS / IMRS appreciaion rae of Home RER H F Resul: under recursive preferences, Home produciviy increase riggers STRONGER Foreign RER & erms of rade (.o.) deerioraion (han wih sandard ime-separable preferences)

13 Under recursive preferences, a rise in Home produciviy riggers a larger wealh ransfer (risk sharing ransfer) o Foreign (han under ime-separable preferences). Foreign consumpion RISES more Wih KPR period uiliy & flexible wage: Foreign oupu rises LESS, i.e. he inernaional correlaion puzzle ges worse Bu wih GHH uiliy or predeermined wage (zero wealh effec on labor supply): Foreign labor and GDP rise more, because of erms of rade effec (on labor demand). To solve correlaion puzzle need RECURSIVE PREFERENCE AND WEAK WEALTH EFFECT ON LABOR 13

14 Quaniaive resul: 14 IN RESPONSE TO SUPPLY (TFP) SHOCKS Model wih recursive uiliy AND mued wealh effec on labor supply generaes REALISTIC cross-counry correlaions of GDP, invesmen, hours worked Model also generaes more VOLATILE REAL EXCHANGE RATE han sandard models

15 Lieraure Vas finance lieraure uses EZW preferences 15 Open economy macro-finance lieraure is slowly beginning o consider EZW preferences, bu mainly considers endowmen economies Eg Kollmann (2009, 2015, 2016) Colacio Croce (2011,2013) Lewis & Liu (2015) Gourio, Siemer & Verdelhan (2013,2015) Ec. These papers show ha EZW preferences can explain volaile real exchange raes

16 16 Conribuion of THIS paper: PRODUCTION economy show ha recursive (EZW) preferences help o RESOLVE inernaional correlaion puzzle. ALSO need weak wealh effec on labor (GHH and/or rigid wage)

17 17 THE MODEL Counries, i=h, F (Home, Foreign) Two raded goods, counry i produces good i 1 wih local labor and capial: Yi, ( Li, i, ) ( Ki, ) i 1 j Counry i final good: Z ( y /(1 )) ( y / ), j i, j i, i, i, i, y : inpu j used by counry i; local spending bias: Final good used for consumpion & invesmen: Zi, Ci, Ii,, Ki, 1 (1 ) Ki, Ii, 1 Counry i final good price: P ( p ) ( p ) i, i, j, Home erms of rade & RER: q p p /, H, H, F, RER P / P ( q ) H, H, F, H, 12 Rise in q, RER: Home erms of rade (.o..) improve & Home RER appreciaes

18 18 Period uiliy (, ) 1 [ (, )] 1 i, i, i, 1 i, i, i, 0, 0 u C L C L Sandard period uiliy: King, Plosser & Rebelo [KPR] (1988) C L i, i, i, ( ), wih ' 0 (consisen wih balanced growh) Greenwood, Hercowiz & Huffman [GHH] (1988) X ( C, L ) C X ( L ), wih, <0 i, i, i, i, i, i, ( X ) 1 ( ), i, i, 1 i, 1 [ i, wih X : ensures balanced growh & saionary hours]

19 19 mrs ( / L )/( / C ). i, i, i, i, i, Household inra-emporal opimizaion: mrs w i, i, w : wage in consumpion unis ( consumpion wage ) i, KPR: w C L L i, i, i, i, GHH: w X L,,, '( )/ ( ) '( ) i i i KPR: offer wage is increasing in Consumpion a wealh increase REDUCED desired labor supply GHH: labor supply does NOT depend on consumpion. Wealh shock does no affec labor supply.

20 20 Recursive EZW ineremporal preferences: {(1 )[ ( C, L )] 1 [ EU 1 ] (1 )/(1 ) } 1/(1 ) i, i, i, i, i, 1 : 1/IES ineremporal elasiciy of subsiuion (IES) : coefficien of risk aversion (CRA) NB When : ime-separable uiliy Ineremporal marginal rae of subsiuion (IMRS) depends on fuure life-ime uiliy u / C U i, 1 i, 1 i, 1 i, 1 u / C ( E U 1 ) 1/(1 ) i, i, i, 1 Efficien risk sharing / RER / RER H, 1 F, 1 1

21 21 u / C U i, 1 i, 1 i, 1 i, 1 1 1/(1 ) ui, / Ci, ( EU i, 1) ; RER H, 1 H, 1 RER F, 1 H, Sandard assumpion: 1/IES (preference for early resoluion of uncerainy) Unexpeced RISE in fuure life-ime uiliy LOWERS IMRS: Consumpion & life-ime uiliy are subsiues <0 Posiive TFP shock in counry H: Relaive consumpion of counry H Relaive life-ime uiliy of counry H RER of counry H depreciaes srongly Relaive price of good H Terms of rade of counry H worsen, Terms of rade of counry F improve

22 22 Invesmen decisions: E i, 1 {( pi, 1 / Pi, 1 ) MPK i, 11 }, MPKi, 1 (1 ) Yi, 1 / Ki, 1 Labor demand:, MPL Y / L, 1,, ( p / P ) MPL w i, i, i, i, i i i Flex-wage economy: ( p / P ) MPL w mrs,, i, i, i, i i Sicky-wage economy (predeermined wage): i, i, i, j, p / P ( p / p ) ( p / P ) MPL w E mrs i i i, i,,, 1 i, ; α>0: impor share Terms of rade improvemen RAISES marginal produc of capial & labor, in final good unis invesmen and labor demand

23 PARAMETERS Preferences: =0.99; Frisch labor supply elasiciy: 2; Ineremporal elasiciy of subsiuion: IES=1.5; Risk aversion: 1/ IES 0.66 & 50 Technology: 0.65 [labor share]; 0.10 [impor share] Produciviy: i, 1 i, i, j, i, 1 ln( ) ln( ) [ln( ) ln( )], Fied o quarerly US & ROW produciviy (hours daa), ROW: aggregae of 13 oher OECD counries Sd( i, 1) = 0.78%; Corr( H, 1, F, 1 ) = 0.13 SOLUTION METHOD: Third-order approx. 23

24 24 Hisorical saisics ( 73q1-13q4) [growh raes/1 s diff.] US ROW Sandard deviaions (%) GDP Sandard deviaions relaive o GDP Consumpion Invesmen Hours worked Real exchange rae 3.03 n.a. Cross-counry correlaions GDP 0.45 Consumpion 0.35 Invesmen 0.34 Hours worked 0.43

25 Prediced momens: Flexible wage Role of: KPR/GHH uiliy; risk aversion (γ) KPR Flexible wage GHH γ=1/ies γ=50 γ=1/ies γ=50 Daa (1) (2) (3) (4) (5) Sandard deviaions (%) GDP Sandard deviaions relaive o GDP C Labor ER Cross-counry correlaions GDP I abor Hansen-Jagannahan bound Recursive preferences: RER volailiy HJ bound (sd(imrs)) KPR uiliy (negaive wealh effec on labor supply): recursive pref. make inernaional correlaion puzzle worse! GHH uiliy (zero wealh effec on labor supply): recursive pref. induce higher crosscounry correl. HJ bound=sd(imrs)/e(imrs); Sharpe raio=e(rx)/sd(rx); SR HJ. Rx: excess reurn; hisorical SR equiy:

26 Prediced momens: Flexible wage vs. Rigid wage Role of: KPR/GHH uiliy; risk aversion (γ) Flexible wage Predeerm. wage KPR GHH KPR GHH γ=1/ies γ=50 γ=1/ies γ=50 γ=50 γ=50 Daa (1) (2) (3) (4) (5) (6) (7) Sandard deviaions (%) GDP Sandard deviaions relaive o GDP C abor ER Cross-counry correlaions GDP C I Labor Hansen-Jagannahan bound HJ bound=sd(imrs)/e(imrs); Sharpe raio=e(rx)/sd(rx); SR HJ. Rx: excess reurn; hisorical SR equiy:

27 27 Impac responses (%) o 1 sd Home TFP innovaion Flexible wage Prede. wage KPR GHH GHH γ=1/ies γ=50 γ=1/ies γ=50 γ=50 Y H Y F C H F Labor H abor F RER H NX H /Y H

28 28 Conclusion Paper has developed simple DSGE model ha solves he inernaional correlaion puzzle : Counry-specific produciviy shocks generae sizable cross-counry correlaions of GDP, invesmen, Labor. Real exchange rae is volaile Key ingrediens (BOTH are needed!) recursive ineremporal preferences ( volaile RER) weak wealh effec on labor supply ( posiive inernaional shock ransmission, via.o.. channel)

29 THANK YOU! 29