This project improves our understanding of international business cycles. It provides new insights into the reasons American national output differs from fluctuations in Europe or Japan. It explains the relation between business cycles in different countries and between cycles and the dynamics of aggregate trade within countries. Dynamic stochastic equilibrium models have had considerable success recently explaining fluctuations in, and correlations between variables in single economies. The theoretical contribution of this project comes from developing multicountry dynamic stochastic models with heterogeneous agents. Most models of macrodynamics are based on a representative agent paradigm, but this assumption does not make sense for international economics because without heterogeneity across countries there is no trade. The project also introduces money into the model in order to examine the relation of the exchange rate to the behavior of money supplies and real variables. The theoretical work is paralleled by a systematic study of international time series data, looking first at correlations between detrended variables in particular countries, and second at correlations between like variables in different countries. Preliminary results suggest that business cycles in different countries have many features in common, but also point to a number of puzzles for the theory. For example, fluctuations in the net exports and output are negatively correlated. Consumption smoothing suggests exactly the opposite, as consumers export when their incomes are high and import when they are low. The project determines whether or not this puzzle can be explained by productivity-induced fluctuations in investment.
