Modeling news-driven international business cycles

This paper reexamines the question of how to explain business cycle co-movements within and between countries. First, we present a simple flexible price models to illustrate how and why news shocks can generate robust positive co-movements in economic activity across countries. We also discuss under what conditions a two-sector version of the model generates appropriate business cycle patterns within countries. Second, we develop a quantitative two-country two-sector model that is capable of replicating news driven international business cycles. The model is a two-country extension of the closed economy model of Beaudry and Portier (2004), in which there are limited possibilities to reallocate factors between investment and consumption-good sectors.

Research highlights
► This paper reexamines the question of how to explain business cycle co-movements within and between countries.
► We present a simple flexible price models to illustrate how and why news shocks can generate robust positive co-movements in economic activity across countries.
► We also discuss under what conditions a two-sector version of the model generates appropriate business cycle patterns within countries.
► We develop a quantitative two-country two-sector model that is capable of replicating news driven international business cycles.