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International business cycle co-movement and vertical specialization reconsidered in multistage Bayesian DSGE model

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  • Wong, Chin-Yoong
  • Eng, Yoke-Kee

Abstract

Business cycle co-movements across countries have been widely documented, and East Asian economies show no exception. We reevaluate a Bayesian estimated two-country real business cycle model with non-sequentially traded intermediates and a New Keynesian model that incorporates simple vertical specialization using trade-weighted observable series of nine East and Southeast Asian economies. Unsurprisingly, counterfactual co-movements are generated. The failure of these models, we argue, stems from the inappropriate formalization of vertical linkage in production and trade. By extending a two-country New Keynesian model with three processing stages to authentically embrace vertical specialization in the form of vertical and processing trade, we show that the Bayesian estimated model is capable of replicating satisfactorily the business cycle co-movements over a large set of macroeconomic variables. And the quantitative ability survives a battery of sensitivity analysis. We thus infer that formalizing vertical and sequential linkage in production through the lens of three processing stages is a fruitful exercise for an international business cycle model to solve trade-comovement puzzle.

Suggested Citation

  • Wong, Chin-Yoong & Eng, Yoke-Kee, 2013. "International business cycle co-movement and vertical specialization reconsidered in multistage Bayesian DSGE model," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 109-124.
  • Handle: RePEc:eee:reveco:v:26:y:2013:i:c:p:109-124
    DOI: 10.1016/j.iref.2012.08.011
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    Cited by:

    1. Nikhil Patel, 2016. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," BIS Working Papers 539, Bank for International Settlements.
    2. Camacho, Maximo & Martinez-Martin, Jaime, 2015. "Monitoring the world business cycle," Economic Modelling, Elsevier, vol. 51(C), pages 617-625.
    3. Nikhil Patel, 2021. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-62, October.
    4. Wong, Chin-Yoong & Eng, Yoke-Kee & Habibullah, Muzafar Shah, 2014. "Rising China, anxious Asia? A Bayesian New Keynesian view," China Economic Review, Elsevier, vol. 28(C), pages 90-106.
    5. Liu, Dayu & Wang, Qiaoru & Song, Yang, 2020. "China’s business cycles at the provincial level: National synchronization, interregional coordination and provincial idiosyncrasy," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 629-650.
    6. Ma, Yong, 2014. "Monetary policy based on nonlinear quantity rule: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 34(C), pages 89-104.

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    More about this item

    Keywords

    International business cycle; Vertical specialization; Bayesian estimation; Trade-comovement puzzle;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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