This dissertation consists of two chapters on international business cycles. In the first chapter, I revisit the problem of the anomaly of terms of trade dynamics. First, I empirically analyze the effect of a US aggregate labor productivity shock on the US terms of trade using a Vector Autoregression (VAR) and Maximum Forecast Error Variance identification. I find that the shock appreciates the terms of trade of the US. Next, using a non-homothetic preference, I explain the dynamics of the terms of trade in response to a positive aggregate productivity shock theoretically. Using a model with endogenous markup and heterogeneous firm-specific productivities, the appreciation of the terms of trade can be generated even under a complete asset market assumption. Unlike previous studies, I explain the dynamics of the terms of trade through a new channel, which is the channel of relative cutoff firm-specific productivity that determines the optimal export decisions of the firms. Depending on the asset market structure, two competing effects, i.e., the income effect and the markup effect, have different implication to terms of trade dynamics. Under the assumption of financial autarky, the income effect is bigger than the markup effect and the terms of trade depreciates in response to a positive aggregate productivity shock. However, if we allow for the trade of state-contingent or non-state contingent bonds, the markup effect also comes into play and the terms of trade appreciates, which is in line with the empirical findings.
In the second chapter, I study the international transmission effects of the news about the Total Factor Productivity (TFP hereafter) of the US to the Canadian and Japanese economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian and Japanese macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country real business cycle (RBC) model with investment adjustment cost and the preference which eliminates the wealth effect on hours worked to generate booms in Canadian and Japanese variables in response to news about future US TFP. I find that international macroeconomic comovements can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian or Japanese TFP to the US news shock is important in order to generate the boom observed in the empirical analysis. Estimated value of the preference parameter indicates that eliminating the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explain the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
