DP11257 International correlation of business cycles in a behavioral macroeconomic model
|Author(s):||Paul De Grauwe, Yuemei Ji|
|Publication Date:||May 2016|
|Keyword(s):||animal spirits, behavioral macroeconomics, Business Cycles|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11257|
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 â??animal spiritsâ??, 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.