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2001, 12
We investigate into the role of the trade channel as important determinant of a country's current account position and the degree of business cycle synchronization with the rest of the world by comparing the predictions of two types of DGE models. It is shown that the behavior of a country's external balance and the international transmission of shocks depends amongst other things on two factors: i) the magnitude of trade interdependence, ii) the degree of substitutability between importable and domestically-produced goods. Using time series data on bilateral trade flows, we estimate the magnitude of trade interdependence and the elasticity of substitution between importable and domestic goods for the G7 countries. Given these estimates, idiosyncratic supply shocks potentially induce changes in the current account and foreign output that vary in direction and magnitude across G7 countries. The relationship between the magnitude of foreign trade and the import substitutability with various correlation measures is examined empirically in a cross-sectional dimension. First Draft, July 2001. Final Draft, November 2001. Klassifikation: E32, F41
2001, 11
Industrial production in G7 countries is assumed to be driven by two exogenous disturbances. Those disturbances are identified in a VAR model so they can be interpreted as country-specific and global supply shocks. The dynamic properties of the model are analyzed and the relative importance of each shock is measured. It is shown that the VAR model matches most of the theoretical predictions of standard intertemporal open-economy models. The identified structural disturbances are analyzed with regard to their impact on the current account and investment. First Draft, October 2000. Final Draft, January 2001. This paper is based on the second chapter of my doctoral dissertation at the University of Frankfurt. Klassifikation: E32, F41