International Business Cycles with Heterogenous Sectors

The `quantity anomalies' that arise from standard international business cycle models are cross-country correlations in consumption being higher than output, and negative comovement in aggregate investment and employment. This paper shows thatincorporating multiple sectors with heterogeneous factor intensities into an otherwisestandard two-country stochastic growth model can resolve these anomalies. Endogenous intratemporal trade creates an additional channel for the propagation of productivity shocks across countries, competing with the standard, `resource allocationeffect'. Moreover, a countryspecic technology shock can induce reallocation of re-sources both across industries and countries. These reallocations alter the compositionof goods produced in countries over the business cycle, and can generate `procyclical' and `countercylical' sectors. An important prediction is that sectoral inputs andoutputs tend to be more correlated across countries for more labor-intensive sectors.Predictions of sectoral dynamics is shown to be broadly consistent with the data.[...]