Discussion Paper Details

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Title: International correlation of business cycles in a behavioral macroeconomic model

Author(s): Paul De Grauwe and Yuemei Ji

Publication Date: May 2016

Keyword(s): animal spirits, behavioral macroeconomics and Business Cycles

Programme Area(s): International Macroeconomics and Finance

Abstract: Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of ‚??animal spirits‚??, i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We do not need a correlation of exogenous shocks to generate synchronization. We also empirically test the main predictions of the model.

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Bibliographic Reference

De Grauwe, P and Ji, Y. 2016. 'International correlation of business cycles in a behavioral macroeconomic model'. London, Centre for Economic Policy Research.