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DOES THE NUMBER OF COUNTRIES IN INTERNATIONAL BUSINESS CYCLE MODELS MATTER?
Author(s) -
Kim Myunghyun
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12888
Subject(s) - economics , cross country , consumption (sociology) , business cycle , open economy , emerging markets , macroeconomics , international economics , social science , sociology , exchange rate
Until the 1980s, standard models with two large open economies (i.e., the United States and Europe) provided plausible representations of the world economy. However, with the emergence of many developing countries since the 1990s, this approach no longer seems reasonable. In line with this change to the global economic environment, cross‐country output correlations between the United States and other countries have risen. This paper extends the standard two‐country model to many countries to show that doing so produces closer cross‐country correlations to the data. In particular, based on analytical investigation with a simple model and quantitative analysis with a more general model, I show that the cross‐country output correlation rises and the cross‐country consumption correlation falls as the number of countries in the two models increases. ( JEL F40 , F41 , F44)