Commodities and International Business Cycles

Output growth in the U.S., a commodity-importing country, increases its demand for imports of commodities and therefore commodity prices, which benefits commodityexporting countries but has adverse effects on commodity-importing countries. Hence, in the data, U.S. output is more positively correlated with outputs of commodity-exporting countries than commodity-importing countries. In other words, U.S. business cycle comovements with other countries differ according to the countries’ commodity trade structures. Nevertheless, this has not been considered in the analyses of international business cycles. This paper addresses this by adding the commodity sector to the foreign country. In the model, the home country (the U.S.) produces tradable and nontradable goods and imports commodities, while the foreign country (commodityexporting countries) produces commodities as well as tradable and nontradable goods and exports commodities. The model produces higher output correlation and lower consumption correlation than a standard two-country model. Notably, unlike standard models, the model yields output correlation that exceeds the consumption correlation, matching the ranking in the data and mitigating the ‘consumption correlation puzzle’. Complementarity between commodities and noncommodity goods in consumption plays a key role in generating this result.