International Transmission of Shocks in a Business-Cycle Model Under Imperfect Competition

Abstract

This paper investigates the effects of introducing imperfect competition in an international business-cycle model. We provide some international evidence on markups and analyze the implications of increasing returns to scale and monopolistic competition for the effects and the international transmission of technology and government spending shocks. We also consider exogenous markup fluctuations as a source of shocks and of transmission of business cycles. We show that imperfect competition improves the behavior of a standard model driven by technology shocks, although the behavior of foreign trade variables remains unexplained. We also show that an imperfectly competitive model driven by government shocks can explain the international business cycle at least as well as a model driven by technology shocks.