This dissertation studies the effect of globalization, specifically increased international trade and financial integration, on various aspects of the international business cycle.
The second chapter, "Globalization and International Business Cycle Co-movement", investigates the links between bilateral trade integration, financial integration, industrial specialization, and business cycle correlation. Using a reduced form empirical approach, and an international real business cycle model with endogenous trade integration, financial integration, industrial specialization, and cyclical co-movement, I show that a model based on classical assumptions can replicate some of the causal channels that we see in the data, but it fails to match others. I then speculate as to what features are missing from the real business cycle model that could explain these empirical irregularities.
The third chapter, "Globalization and the Phillips Curve", attempts to find the effect of increasing trade integration on the short run tradeoff between output and inflation. Specifically, we try to answer two closely related questions. Will increased international trade integration make inflation less sensitive to movements in the domestic output gap, and will inflation become more sensitive to movements in the foreign output gap? This paper answers these questions using a sticky price DSGE model. We find that trade integration leads to a slight reduction in the sensitivity of inflation to the domestic output gap. Also, inflation is somewhat sensitive to the foreign output gap, and this sensitivity increases with the level of trade integration.
The fourth chapter, "Variable Markups and International Business Cycle Co-movement", incorporates endogenous markup variability into a real business cycle model to evaluate the impact of markup variability on international business cycle co-movement. We show both the qualitative and quantitative significance of markup variability on cyclical co-movement, and we show that introducing markup variability can help reconcile the positive effect of trade on co-movement found in the data with the negative effect predicted by the real business cycle model (the trade-comovement puzzle). Thus this paper shows how strategic production decisions by individual firms can have a significant effect on the co-movement of aggregate production across countries.
