Revisiting Cross-Country Correlation Anomalies

A productivity shock leads to a large international transfer of capital in the typical two-country real business cycle model. Most recent models that attempt to reduce or remove this transfer produce unrealistically low investment volatility. We show that adding learning-by-doing to the technological environment of a relatively standard international business cycle model can ameliorate this problem. In addition we show that GHH preferences along with the above modification are sufficient to deliver positive cross-country correlations of consumption, hours, output and investment.