Working Paper

By force of demand: explaining international comovements and the saving-investment correlation puzzle


Abstract: This paper explores the possibility that economic fluctuations may be largely demand-driven. It is shown that the stylized open-economy business cycle regularities documented by Feldstein and Horioka (1980) and Backus, Kehoe and Kydland (1992) can be explained by demand shocks alone even in a standard general equilibrium model. Frictions such as market incompleteness, increasing returns to scale, and sticky prices do not appear to be the preconditions for resolving these long-standing puzzles.

Keywords: Business cycles; Saving and investment;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2005

Number: 2005-043