TASTES AND TECHNOLOGY IN A 2-COUNTRY MODEL OF THE BUSINESS-CYCLE - EXPLAINING INTERNATIONAL COMOVEMENTS

Trade on international financial markets allows people to insure count ry-specific risk and smooth consumption intertemporally. Equilibrium m odels of business cycles with trade on global financial markets typica lly yield international consumption correlations near 1 and excessive volatility of investment. We incorporate ate nontraded goon's in the m odel and find that the implications for aggregate consumption, investm ent, and the trade balance are consistent with business-cycle properti es of industrialized countries. However, the model driven by technolog y shocks alone yields counterfactual implications for comovements betw een consumption and prices at the sectoral level. Taste shocks produce price - quantity relationships more consistent with the data.