Durables in Open Economy Macroeconomics.

Abstract

This dissertation studies the roles that durable goods play in open economy macroeconomics. The three essays examine if and how durable goods improve the ability to understand business cycle features.

The first essay shows how investment behavior and international risk sharing, two business cycle features that many models have failed to explain, can be addressed in a single model. The key feature of the two-country model in this essay is the use of structures in addition to the use of equipment in production. Structures are nontraded goods, which dampen the mobility of capital and explain the positive co-movement of investment across countries. The ability to use nontraded goods in investment increases the wealth effect from country-specific shocks and explains the low correlation between relative consumption and the real exchange rate, i.e., the lack of international risk sharing.

The second essay incorporates trade in durable goods in an otherwise standard two-country, two-good real business cycle model. Because traded goods are durable, terms of trade movements cause reallocations of purchases across time as well as across goods. The model explains why a deterioration of the terms of trade may not lead immediately to a switch away from a relatively more expensive imported good toward a domestic good. In addition to providing consumption risk sharing, asset markets play an important role in facilitating the reallocation of durable purchases across time.

The third essay documents that the United States and other industrialized economies are more open to international trade and that a growing fraction of goods traded are capital goods. This essay presents a two-country model with variable capital utilization in order to study the impact of these changes on business cycles. The main finding is that these changes by themselves do not strongly affect the volatility of output. Greater trade openness has not been, at least not directly, a contributing factor in the moderation of business cycles since the mid-1980s. A potentially more important effect is the improved ability to allocate resources across borders to achieve higher efficiency in production.