2023/01 | LEM Working Paper Series | ||||||||||||||||
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Synchronization of endogenous business cycles |
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Marco Pangallo |
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Keywords | |||||||||||||||||
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Synchronization; Business Cycles; Non-linear dynamics; Networks.
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JEL Classifications | |||||||||||||||||
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C61, E32, F44
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Abstract | |||||||||||||||||
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Business cycles tend to comove across countries. However, standard models that
attribute comovement to propagation of exogenous shocks struggle to generate a level of
co-movement that is as high as in the data. In this paper, we consider models that produce
business cycles endogenously, through some form of non-linear dynamics—limit cycles or
chaos. These models generate stronger comovement, because they combine shock propagation
with synchronization of endogenous dynamics. In particular, we study a demand-driven
model in which business cycles emerge from strategic complementarities within countries,
synchronizing their oscillations through international trade linkages. We develop an
eigen-decomposition that explores the interplay between non-linear dynamics, shock propagation
and network structure, and use this theory to understand the mechanisms of synchronization.
Next, we calibrate the model to data on 24 countries and show that the empirical
level of comovement can only be matched by combining endogenous business cycles with
exogenous shocks. Our results lend support to the hypothesis that business cycles are at
least in part caused by underlying non-linear dynamics.
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