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.