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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
International real business cycles with endogenous markup variability
Scott Davis
Kevin X. D. Huang
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.


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Scott Davis & Kevin X. D. Huang, International real business cycles with endogenous markup variability, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 60, 2010.
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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.
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