DOES THE NUMBER OF COUNTRIES IN INTERNATIONAL BUSINESS CYCLE MODELS MATTER?

Until the 1980s, standard models with two large open economies (i.e., the United States and Europe) provided plausible representations of the world economy. However, with the emergence of many developing countries since the 1990s, this approach no longer seems reasonable. In line with this change to the global economic environment, cross‐country output correlations between the United States and other countries have risen. This paper extends the standard two‐country model to many countries to show that doing so produces closer cross‐country correlations to the data. In particular, based on analytical investigation with a simple model and quantitative analysis with a more general model, I show that the cross‐country output correlation rises and the cross‐country consumption correlation falls as the number of countries in the two models increases. [ABSTRACT FROM AUTHOR]