Interacting Business Cycle Fluctuations: A Two-Country Model

Publisher:
World Scientific Publishing Company
Publication Type:
Journal Article
Citation:
Singapore Economic Review, 2006, 51 (3), pp. 365 - 394
Issue Date:
2006-01
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In this paper, we develop a model of business cycle fluctuations between two interacting open economies within the disequilibrium or non-market clearing paradigm. We analyze the main feedback mechanisms (Keynes, Mundell, Rose and Dornbusch) driving the dynamics and the conflict between their stabilizing and destabilizing tendencies and how these depend on certain key speeds of adjustment in the real and foreign exchange sectors. We explore numerically a variety of situations of interacting price cycles in the two countries, where the steady state is locally repelling, but where the overall dynamics are bounded in an economically meaningful domain by assuming downward money wage rigidity.
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