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Diego A. Comin, Norman Loayza, Farooq Pasha, Luis Serven
NBER Working Paper No. 15428
Issued in October 2009
NBER Program(s): EFG
IFM
ITI
PR
---- Abstract -----
We build a two country asymmetric DSGE model with two features: (i) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (ii) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-US trade and FDI flows. The model is able to explain (i) why US shocks have a larger effect on Mexico than in the US and hence why the Mexican economy is more volatile than the US; (ii) why US business cycles lead over medium term fluctuations in Mexico and (iii) why Mexican consumption is not less volatile than output.
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