Explaining International Comovements of Output and Asset Returns: The Role of Money and Nominal Rigidities
June 1, 1999
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Summary
Empirically, output and asset returns are highly positively correlated across the United States and the other major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the Real Business Cycle tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages and a flexible exchange rate. The structure here predicts positive international transmission of country-specific monetary policy and technology shocks, and it generates sizable cross-country correlations of output and of asset returns.
Subject: Currencies, Economic theory, Exchange rates, Foreign exchange, Monetary base, Money, Prices, Sticky prices, Supply shocks
Keywords: Cross-country correlation of output and asset returns, Currencies, equity return, Exchange rates, home money supply supply shock, international transmission of business cycles, Monetary base, money, money supply innovation, money supply shock, money supply supply shock, nominal interest rate, nominal rigidities, price level, Sticky prices, supply schedule, Supply shocks, WP
Pages:
50
Volume:
1999
DOI:
Issue:
084
Series:
Working Paper No. 1999/084
Stock No:
WPIEA0841999
ISBN:
9781451850628
ISSN:
1018-5941
