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 that incorporating multiple sectors with heterogeneous factor intensities into an otherwise standard 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 allocation effect'. Moreover, a country-specific technology shock can induce reallocation of resources both across industries and countries. These reallocations alter the composition of goods produced in countries over the business cycle, and can generate `procyclical' and `countercylical' sectors. An important prediction is that sectoral inputs and outputs 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.