International Impact of Productivity Shocks with Endogenous Labor Supply

The Two Large Economy Case

The study constructs a deterministic, overlapping-generations, two-economy model. The analysis is conducted in the context of an infinitely-lived economy where individuals have finite (two-periods) lifetimes. The model shows that a positive productivity shock produces positive correlation between savings and investment despite the fact that there is perfect international capital mobility. Further, the simulation results show that the endogeneity of the labor supply gives rise to cyclical adjustment of the economy towards its steady state. (JEL Classification: F4)