International Macroeconomic Fluctuations: A New Open Economy Macroeconomics Interpretation

Abstract

This paper investigates international macroeconomic fluctuations in light of NOEM (New Open Economy Macroeconomics) models. A model with four major economic disturbances (technology shocks, labor supply shocks, preference shocks, and nominal shocks) is analytically solved to derive theoretical long-run identification restrictions. These restrictions are used to estimate a structural VAR model for the three largest economies (the U.S., the Euro Area, and Japan) over the post Bretton Woods period. The main findings are: (1) the signs of the dynamic responses are mostly consistent with theoretical predictions; (2) supply-side shocks (technology and labor supply shocks) explain most of the fluctuations in cross-country output deviations; (3) preference shocks are the dominant source of real exchange rate fluctuations; and (4) productivity shocks played a prominent role in the recent global imbalances (large U.S. external deficit), while the current account has usually been influenced by all four shocks, with no single shock dominant in all periods.