Technology shocks and current account dynamics

Despite success along some dimensions, international business cycle models have difficulty replicating several salient features of international capital flows among developed countries. In particular, net exports and current account balances are much more persistent in the data than in standard models. We account for this feature of the data with a simple onegood two-country model in which technology exhibits long run growth differences between the two countries. This specification implies persistent differences in per capita GDPs across countries, that are similar to what we observe among developed countries. Large and persistent trade balances arise as an optimal outcome of the model. JEL Classification Codes: F21, F32, E20.