Skip to main content
×
Home
    • Aa
    • Aa

A NOTE ON THE BUSINESS CYCLE IMPLICATIONS OF TRADE IN INTERMEDIATE GOODS

  • Aurélien Eyquem (a1) and Güneş Kamber (a2)
Abstract

Trade in intermediate goods is an important feature of trade in developed small open economies. We show that a model that assumes trade in intermediate goods brings the dynamics of an otherwise standard small open economy closer to what is observed in the data. With trade in intermediate goods, movements of international relative prices affect the economy through an additional channel, denoted the “cost channel.” A model embedding this channel comes closer to business cycle data in several dimensions compared to models with trade in final goods only. It increases the share of output variance explained by foreign shocks, lowers the exchange rate pass-through, and delivers a positive international correlation of outputs. In addition, the matching of other business cycle moments is at least as good as in a model with trade in final goods only.

Copyright
Corresponding author
Address correspondence to: Güneş Kamber, Economics Department, Reserve Bank of New Zealand, 2 The Terrace, P.O. Box 2498, Wellington, New Zealand; e-mail: Gunes.Kamber@rbnz.govt.nz.
References
Hide All
Aastveit K.A., Bjornland H.C., and Thorsrud L.A. (2011) The World Is Not Enough! Small Open Economies and Regional Dependence. Working paper 2011/16, Norges Bank.
Benigno P. (2009) Price stability with imperfect financial markets. Journal of Money, Credit and Banking 41 (1), 121149.
Benigno P. and Woodford M. (2005) Inflation stabilization and welfare: The case of a distorted steady state. Journal of the European Economic Association 3 (6), 11851236.
Calvo G. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12 (3), 383398.
Canzoneri M., Cumby R., and Diba B. (2007) The cost of nominal inertia in NNS models. Journal of Money, Credit and Banking 39 (7), 15631586.
Cavallari L. (2004) Optimal monetary rules and internationalized production. International Journal of Finance and Economics 9 (2), 175186.
Coeurdacier N., Kollmann R., and Martin P. (2010) International portfolios, capital accumulation and foreign assets dynamics. Journal of International Economics 80 (1), 100112.
de Paoli B. (2009) Monetary policy and welfare in a small open economy. Journal of International Economics 77 (1), 1122.
Devereux M. and Engel C. (2007) Expenditure switching versus real exchange rate stabilization: Competing objectives for exchange rate policy. Journal of Monetary Economics 54 (8), 23462374.
Eyquem A. and Kamber G. (2010) Internationalised Production in a Small Open Economy. Reserve Bank of New Zealand working paper 2010/4.
Feenstra R.C. (1998) Integration of trade and disintegration of production in the global economy. Journal of Economic Perspectives 12 (4), 3150.
Galí J. and Monacelli T. (2002) Monetary Policy and Exchange Rate Volatility in a Small Open Economy. NBER working paper 8905.
Galí J. and Monacelli T. (2005) Monetary policy and exchange rate volatility in a small open economy. Review of Economic Studies 72 (3), 707734.
Huang K.X. and Liu Z. (2007) Business cycles with staggered prices and international trade in intermediate inputs. Journal of Monetary Economics 54 (4), 12711289.
Hummels D., Ishii J., and Yi K.-M. (2001) The nature and growth of vertical specialization in world trade. Journal of International Economics 54 (1), 7596.
Justiniano A. and Preston B. (2010) Can structural small open-economy models account for the influence of foreign disturbances? Journal of International Economics 81 (1), 6174.
Kose M.A., Otrok C., and Whiteman C.H. (2003) International business cycles: World, region, and country-specific factors. American Economic Review 93 (4), 12161239.
Kose M.A., Otrok C., and Whiteman C.H. (2008) Understanding the evolution of world business cycles. Journal of International Economics 75 (1), 110130.
Lubik T.A. and Schorfheide F. (2007) Do central banks respond to exchange rate movements? A structural investigation. Journal of Monetary Economics 54 (4), 10691087.
McCallum B. and Nelson E. (2000) Monetary policy for an open economy: An alternative framework with optimizing agents and sticky prices. Oxford Review of Economic Policy 16 (4), 7491.
Miroudot S., Lanz R., and Ragoussis A. (2009) Trade in Intermediate Goods and Services. OECD Trade Policy working paper 93.
Monacelli T. (2005) Monetary policy in a low pass-through environment. Journal of Money, Credit and Banking 37 (6), 10471066.
Shi K. and Xu J. (2007) Optimal monetary policy with vertical production and trade. Review of International Economics 15 (3), 514537.
Thoenissen C. (2011) Exchange rate dynamics, asset market structure, and the role of the trade elasticity. Macroeconomic Dynamics 15 (1), 119143.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 25 *
Loading metrics...

Abstract views

Total abstract views: 274 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 24th October 2017. This data will be updated every 24 hours.