Working Paper

International real business cycles with endogenous markup variability


Abstract: The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model.

JEL Classification: E32; F41; L16;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2010

Number: 60

Pages: 36 pages

Note: Published as: Davis, Scott and Kevin X.D. Huang (2011), "International Real Business Cycles with Endogenous Markup Variability," Journal of International Economics 85 (2): 302-316.