Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154379
Authors: 
Lambrias, Kyriacos
Year of Publication: 
2016
Series/Report no.: 
ECB Working Paper 1946
Abstract: 
We propose a fully flexible, complete-market model of the international business cycle that is consistent with two major empirical facts: positive cross-country co-movement of economic aggregates and a negative correlation between the real exchange rate and relative consumption (the Backus-Smith puzzle). The novelty of our paper is twofold. First, we allow for imperfect substitutability of capital which significantly reinforces Harrold-Balassa-Samuelson effects, producing more empirically relevant movements in real exchange rates. Second, we introduce changes in expectations (news-shocks) as an explanation to the Backus-Smith puzzle through movements in relative hours across countries, while being consistent with expectations-driven economic expansions.
Subjects: 
Backus-Smith Puzzle
news-driven cycles
real-exchange rates
JEL: 
F41
F44
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2194-7
Document Type: 
Working Paper

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