S-Curve Redux: On the International Transmission of Technology Shocks
Title: S-Curve Redux: On the International Transmission of Technology Shocks
Publisher: European University Institute
Series/Report no.: EUI ECO; 2006/36
Using vector autoregressions on U.S. time series, we find that technology shocks induce an ‘S’- shaped cross-correlation function for the trade balance and the terms of trade (S-curve). In calibrating a prototypical international business cycle model to match the S-curve under complete and incomplete financial markets, we find two distinct sets of parameter values. While both model specifications deliver the S-curve, the underlying transmission mechanism of technology shocks is fundamentally different. Most importantly, only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks - as suggested by time series evidence.
Subject: S-curve; Technology shocks; Terms of trade; Trade balance; Incomplete markets; F41; E32; F32
Type of Access: openAccess