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American Economic Journal. Macroeconomics


Business cycle fluctuations in developed economies (N) tend to have large and persistent e§ects on developing countries (S). We study the transmission of business cycle fluctuations for developed to developing economies with a two-country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. Consistent with the model we observe that the flow of technologies from N to S co-moves positively with output in both N and S. After calibrating the model to Mexico and the U.S., it can explain the following stylized facts: (i) shocks to N have a large effect on S; (ii) business cycles in N lead over medium term fluctuations in S; (iii) the outputs in S and N co-move more than their consumption; and (iv) interest rates in S are counter-cyclical.