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Synchronization of endogenous business cycles

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Document pages: 51 pages

Abstract: Comovement of economic activity across sectors and countries is a definingfeature of business cycles. However, standard models that attribute comovementto propagation of exogenous shocks struggle to generate a level of comovementthat is as high as in the data. In this paper, we consider models that producebusiness cycles endogenously, through some form of non-linear dynamics---limitcycles or chaos. These models generate stronger comovement, because theycombine shock propagation with synchronization of endogenous dynamics. Inparticular, we study a demand-driven model in which business cycles emerge fromstrategic complementarities across sectors in different countries,synchronizing their oscillations through input-output linkages. We first use acombination of analytical methods and extensive numerical simulations toestablish a number of theoretical results. We show that the importance thatsectors or countries have in setting the common frequency of oscillationsdepends on their eigenvector centrality in the input-output network, and wedevelop an eigendecomposition that explores the interplay between non-lineardynamics, shock propagation and network structure. We then calibrate our modelto data on 27 sectors and 17 countries, showing that synchronization indeedproduces stronger comovement, giving more flexibility to match the data.

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