News and Business Cycles in Open Economies

Nir Jaimovich and Sergio Rebelo

Journal of Money, Credit and Banking, 2008, vol. 40, issue 8, 1699-1711

Abstract: We study the effects of news about future total factor productivity (TFP) in a small open economy. We show that an open‐economy version of the neoclassical model produces a recession in response to good news about future TFP. We propose an open‐economy model that generates comovement in response to TFP news. The key elements of our model are a weak short‐run wealth effect on the labor supply and adjustment costs to labor and investment. We show that our model also generates comovement in response to news about future investment‐specific technical change and to “sudden stops.”

Date: 2008
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https://doi.org/10.1111/j.1538-4616.2008.00179.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:40:y:2008:i:8:p:1699-1711

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