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International business cycles and the dynamics of the current account

Author: Fatás, Antonio ; Elliott, GrahamINSEAD Area: Economics and Political ScienceIn: European Economic Review, vol. 40, no. 2, feb. 1996 Language: EnglishDescription: p. 361-387.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: This paper analyses the transmission of productivity shocks across countries and how the responses of investment and the current account differ depending on the degree of propagation of shocks. We explore both issues by estimating a structural model for Japan, The US and Europe. We postulate, as an identifying assumption, that the propagation of shocks is proportional to trade. We find that there is a strong asymmetry in that shocks to the US propagate quickly to the other two economies while European and Japanese shocks have little impact in other countries' productivity. When we explore the responses of investment and the current account we find that productivity increases lead to domestic investment booms and current account deficits. Investment in other countries tends to react positively to productivity shocks, even when the shock is purely national
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This paper analyses the transmission of productivity shocks across countries and how the responses of investment and the current account differ depending on the degree of propagation of shocks. We explore both issues by estimating a structural model for Japan, The US and Europe. We postulate, as an identifying assumption, that the propagation of shocks is proportional to trade. We find that there is a strong asymmetry in that shocks to the US propagate quickly to the other two economies while European and Japanese shocks have little impact in other countries' productivity. When we explore the responses of investment and the current account we find that productivity increases lead to domestic investment booms and current account deficits. Investment in other countries tends to react positively to productivity shocks, even when the shock is purely national

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