TY  - JOUR
AU  - Baxter,Marianne
AU  - Farr,Dorsey
TI  - Variable Factor Utilization and International Business Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8392
PY  - 2001
Y2  - July 2001
UR  - http://www.nber.org/papers/w8392
L1  - http://www.nber.org/papers/w8392.pdf
N1  - Author contact info:
Marianne Baxter
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-2417
Fax: 617/353-4449
E-Mail: mbaxter@bu.edu

Dorsey D. Farr
E-Mail: dfarr@frenchwolffarr.com
AB  - When an economic boom produces high output, employment, and investment in the United States, there is usually a simultaneous boom in other industrialized countries. But, why? Answering this question is a central goal of international macroeconomics. However, multi-country dynamic equilibrium models have struggled with two major problems. The first difficulty is that the productivity shocks required by the model are implausibly large and volatile. Second, these models have difficulty explaining why factor inputs move together so closely across countries: realistic international comovement of business cycles requires implausibly high cross-country correlations of productivity shocks. This paper builds a model in which the utilization rates of capital and labor can be varied in response to shocks. We find that variable factor utilization is quite successful in (i) reducing the required size of productivity shocks; and (ii) increasing international comovement of factor inputs, with most of the improvement stemming from variable capital utilization.
ER  -