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

Published online by Cambridge University Press:  11 March 2013

Aurélien Eyquem  and
Güneş Kamber
Aurélien Eyquem
Affiliation:
Université de LyonCNRSGATE Lyon Saint-EtienneUniversité Lyon 2 and GREDI
Güneş Kamber*
Affiliation:
Reserve Bank of New Zealand
*
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.
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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.

Keywords

Small Open EconomyIntermediate GoodsBusiness CyclesExchange Rate Pass–Through
Type
Notes
Information
Macroeconomic Dynamics , Volume 18 , Issue 5 , July 2014 , pp. 1172 - 1186
Copyright
Copyright © Cambridge University Press 2013 

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