Logo
Munich Personal RePEc Archive

Home Production and Small Open Economy Business Cycles

Chen, Kuan-Jen and Chu, Angus C. and Lai, Ching-Chong (2014): Home Production and Small Open Economy Business Cycles.

Warning
There is a more recent version of this item available.
[thumbnail of MPRA_paper_65093.pdf]
Preview
PDF
MPRA_paper_65093.pdf

Download (583kB) | Preview

Abstract

This paper incorporates home production into a real business cycle (RBC) model of a small open economy to explain the empirical pattern of international business cycles in developed economies and emerging markets. It is well known in the literature that in order for the RBC model to replicate quantitatively plausible empirical moments of small open economies, the model needs to feature counterfactually a small income effect on labor supply. This paper provides a solution to this puzzle by considering home production that introduces substitutability between market consumption and home consumption, which in turn generates a high volatility in market consumption in accordance with the data, even in the presence of a sizable income effect on labor supply. Furthermore, the model with estimated parameter values based on the simulated method of moments is able to match other empirical moments, such as the standard deviations of output, investment and the trade balance and the correlations between output and other macroeconomic variables. Given that home production is more prevalent in emerging markets than in developed economies, the model is also able to replicate empirical differences between emerging markets and developed economies in the volatility of market consumption and the volatility/countercyclicality of the trade balance.

Available Versions of this Item

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.