Explaining international comovements of output and asset returns: The role of money and nominal rigidities. (Q5958099)

Output and asset returns are highly positively correlated across the U.S. and the remaining major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the real business cycle (RBC) tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages. The structure here generates cross-country correlations of output and returns that are markedly higher, and hence closer to the data, than the cross-country correlations that obtain when flexible prices and wages are assumed.