A Two-Sector International Real Business Cycles Model with IST Shocks

Can investment-specific technology (IST) shocks explain two of the international business cycles puzzles - the consumption/output anomaly and the international co-movement puzzle?  I construct a set of international business cycles facts which are comparable with the moments calculated from the simulated data of an international real business cycles (IRBC) model with investment-specific technology shocks. I develop a two-country, two-good and two-sector (consumption and investment goods producing sectors) IRBC model with IST and aggregate neutral technology shocks to compare its simulated moments with a new set of international business cycles facts. I use the model to study the roles of IST shocks, aggregate neutral technology shocks and trade in investment goods in explaining the international business cycle facts. In contrast to the existing IRBC models with IST shocks, I find that the aggregate neutral technology shocks are relatively more important in explaining the positive cross-country correlation in output. This is mainly because of the sectoral factor re-allocation effects arising from technology shocks in a two-sector model. IST shocks increases the cross-country correlations in labor and investment. Trade in investment goods increases the cross-country correlations of output and labor, but it decreases the cross-country correlations of investment spending. Thus, this IRBC model also makes a progress towards solving the  consumption/output anomaly and the international co-movement puzzle by explaining the observed strongly positive cross-country correlations in output and labor.