The international business cycle as intertemporal coordination failure

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Author(s)
Bilo, Simon
Date Issued
November 18, 2016
Abstract
Where investments are irreversible and the future is uncertain, people in two countries can make investment decisions that turn out to be mutually inconsistent. I argue that this intertemporal coordination failure explains international business cycles in a two-currency-area setting with a floating foreign exchange rate. The sequence of events starts with an expansionary domestic monetary shock, which decreases the domestic real interest rate. Facing low transactions costs, people spend the new money relatively early in the foreign exchange market and in the foreign market for loanable funds. Domestic monetary expansion thereby changes the relative prices of domestic and foreign goods and also of goods of earlier and later stages of production. The relative price changes lead to intertemporal and international coordination failures once the monetary expansion ends and relative prices change. Domestic monetary policy thereby causes the comovement across different currency areas we observe of business cycles.
Journal
Review of Austrian Economics
Department
Economics
Citation
Bilo, S. (2016). The international business cycle as intertemporal coordination failure. Review of Austrian Economics: 1-23. doi: 10.1007/s11138-016-0366-8
Publisher
Springer
Version of Article
Published article
DOI
10.1007/s11138-016-0366-8
ISSN
0889-3047
1573-7128
Rights
This article was selected and published in the Review of Austrian Economics © 2016 Bilo. All rights reserved.
Subjects

Hayek

Nonneutrality of mone...

Intertemporal coordin...

International busines...

Structure of producti...

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