Globally Correlated Nominal Fluctuations

Espen Henriksen, Finn E. Kydland, Roman Sustek

NBER Working Paper No. 15123
Issued in July 2009
NBER Program(s):   ME

Cyclical fluctuations in nominal variables—aggregate price levels and nominal interest rates—are documented to be substantially more synchronized across countries than cyclical fluctuations in real output. A transparent mechanism that can account for this striking feature of the nominal environment is highlighted. It is based on (small) cross-country spillovers of shocks and an interaction between Taylor rules and no-arbitrage conditions. The mechanism is quantitatively important for a wide range of plausible parameterizations and is found to be robust to modifications of the economic environment that help account for other important features of domestic and international aggregate fluctuations.

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This paper was revised on December 5, 2011

Acknowledgments

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