Dynamics of Output Growth, Consumption and Physical Capital in Two-Sector Models of Endogenous Growth

This paper develops a multi-country macro-finance model to study international economic and financial linkages. This approach models the economy and financial markets jointly using both types of data to throw light on such issues. The world economy is modelled using data for the US and aggregate OECD economies as well as the US Treasury bond market, using latent variables to represent a common inflation trend and a US real interest rate factor. We find strong evidence of OECD effects on the US, calling into question the standard closed economy macro-finance specification. The two global latent variables also affect the UK economy, together with two additional UK-specific latent variables. These economic linkages also help to explain the comovement of yields in the US and UK Treasury bond markets. JEL Classification: C12 E43 F41 G1