Cointegrated TFP Processes and International Business Cycles

Federal Reserve Bank of Atlanta Working Paper Series No. 2009-23

44 Pages Posted: 4 Oct 2009

See all articles by Pau Rabanal

Pau Rabanal

International Monetary Fund

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Vicente Tuesta Reátegui

Banco Central de Reserva del Peru

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2009

Abstract

A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that total factor productivity processes for the United States 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 explaining the observed high real exchange rate volatility. Also, we show that the observed increase of the real exchange rate volatility with respect to output in the past twenty years can be explained by changes in the parameter of the VECM.

Keywords: international business cycles, real exchange rates, cointegration

JEL Classification: E32, F32, F33, F41

Suggested Citation

Rabanal, Pau and Rubio-Ramirez, Juan Francisco and Tuesta Reátegui, Vicente, Cointegrated TFP Processes and International Business Cycles (September 1, 2009). Federal Reserve Bank of Atlanta Working Paper Series No. 2009-23, Available at SSRN: https://ssrn.com/abstract=1480903 or http://dx.doi.org/10.2139/ssrn.1480903

Pau Rabanal

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

Juan Francisco Rubio-Ramirez (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

Vicente Tuesta Reátegui

Banco Central de Reserva del Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

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