Heckscher-Ohlin Business Cycles

This Paper introduces Heckscher-Ohlin trade features into a two-country DSGE model, and studies how productivity shocks propagate through trade in goods. In comparison with standard models, the business cycle properties of our framework are broadly compatible with the empirical evidence. Moreover, the model yields some novel predictions that distinguish it from the existing international real business cycle literature: (1) transitory shocks to productivity have permanent effects on country-level aggregate variables; (2) aggregate productivity shocks have relevant effects on the sectoral allocation of production factors; (3) under complete asset markets, the international correlation of consumption is lower than that of output; (4) the model’s predictions on the correlation of the terms of trade with the main aggregate variables are compatible with the data.