Three Essays on International Transmission of Business Cycles

This dissertation consists of three chapters on international transmission of business cycles. It constructs dynamic, stochastic, general equilibrium (DSGE) models that incorporate heterogeneous agents on the producer side; entry and exit dynamics; fixed exporting costs; and iceberg trade costs. I explain simulation results along the way how the models matter for policy and empirical regularities identified in the literature. This dissertation shows how micro-founded firm-level dynamics can improve the performance of the standard international business cycle models. In the first chapter, In this paper, I propose a two-country, dynamic, stochastic, general equilibrium (DSGE) model with endogenous tradability, product differentiation, variously determined physical capital, and an elastic labor supply to explore the propagation of business cycles across countries. I show that the model successfully addresses international relative price dynamics (its appreciation with positive home productivity shock) through the entry of producers and their cut-off productivities of exporting. The use of endogenous physical capital in the model induces a more realistic framework since the simulated model is compared to the investment data that covers spending on capital equipment, structures and inventories for producers entry and exit dynamics. Building the model with endogenous capital and elastic labor supply weakens the volatility of investment compared to conventional international real business cycle (IRBC) models. The model also accounts for several features of the data, such as the volatility of aggregate variables and their correlations with GDP. In the second chapter, I explore the aggregate effects of trade restrictions in a two-country, dynamic, stochastic, general equilibrium (DSGE) model with firm selection and variable adjustment of markup. As a response to the trade collapse in the global crisis of 2008 and 2009, temporary trade restrictions have emerged in several countries. With analyzing the dynamics of a negative macroeconomic shock in the home economy first, and the subsequent introduction of trade restrictions in the foreign economy second, I show that both economies are in a worse position than they were during the economic downturn. The follow-ups to the recession and trade restrictions are investigated through three mechanisms: a) variable markup as a new avenue of increasing competitive pressure for producers (e.g. more competitive firms lower their markups.); b) average individual firms\u27 specific productivity cut-off, which induces their optimum export choice (e.g. an increase in the export productivity cut-off means exporting becomes more difficult than before.); and c) the movement of international relative prices (e.g. the real exchange rate and terms of trade). In the final chapter, I examine the effects of adding non-traded sector and trade in intermediate goods sector, and their impact on the `Backus-Smith\u27 (BS) puzzle and the features of the non-traded output. Conventional IRBC models show that the real exchange rate and the terms of trade is positively correlated to the relative consumption movement between the home and foreign economies when there is a total factor productivity shock, while the correlation in the data is negative. I develop a two-country, dynamic, stochastic, general equilibrium (DSGE) model with staggered price setting in non-tradable sector and international trade in intermediate goods sector due to product differentiation in a high asset market frictions situation. When the world economy has positive country-specific productivity shock, the benchmark model successfully solves the BS puzzle and is able to match several features of the data. The dynamic responses to productivity shock show that integrating product differentiation is necessary to generate a more volatile and countercyclical non-traded output