Romain Houssa, Jolan Mohimont & Chris Otrok (2023) European Economic Review
Abstract
This paper offers a solution to the international co-movement puzzle found in open-
economy macroeconomic models. We develop a small open-economy (SOE) dynamic
stochastic general equilibrium (DSGE) model describing three endogenous channels that
capture spillovers from the world to a commodity exporter: a world commodity price
channel, a domestic commodity supply channel, and a financial channel. We estimate our
model with Bayesian methods on two commodity-exporting SOEs, namely Canada and
South Africa. In addition to explaining international business cycle synchronization, the
new model attributes an important fraction of business cycle fluctuations to foreign shocks
in the SOEs.
