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AGENCY COSTS, RISK SHOCKS, AND INTERNATIONAL CYCLES

Published online by Cambridge University Press:  04 July 2017

Marc-André Letendre*
Affiliation:
McMaster University
Joel Wagner
Affiliation:
Bank of Canada
*
Address correspondence to: Marc-André Letendre, Department of Economics, McMaster University, 1280 Main Street West, Hamilton, Ontario, L8S 4M4, Canada; e-mail: [email protected].

Abstract

We add agency costs into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries, the relative price of investment is positively correlated across countries in our model, much as it is in detrended U.S./Euro-area data. We also find that financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output, and investment. We then compare this model to an alternative model that also includes risk shocks. We use credit spread data (for the United States) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model's dynamics.

Type
Articles
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We would like to thank conference participants at the 2013 Canadian Economics Association meeting, Alok Johri, Bill Scarth, and two anonymous referees for their helpful comments. The views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank of Canada.

References

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