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Cointegrated TFP processes and international business cycles

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  • Rabanal, Pau
  • Rubio-Ramírez, Juan F.
  • Tuesta, Vicente

Abstract

A puzzle in international macroeconomics is that real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. This paper provides evidence that TFP processes for the U.S. and the "rest of the world" are characterized by a vector error correction model (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps to explain the observed high real exchange rate volatility. Also, the model can explain the observed increase in real exchange rate volatility with respect to output in the last 20 years by changes in the parameters of the VECM.

Suggested Citation

  • Rabanal, Pau & Rubio-Ramírez, Juan F. & Tuesta, Vicente, 2011. "Cointegrated TFP processes and international business cycles," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 156-171, March.
    • Handle: RePEc:eee:moneco:v:58:y:2011:i:2:p:156-171
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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