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Abstract
A non-linear, two-country Kaleckian model of the business cycle was developed for investigating business cycle synchronization. The model includes three components: a country-specific business cycle-generating equation, a transmission mechanism and time delays in the transmission mechanism. The model constructed is a non-linear delay-differential equation system. Solutions to the model without time delays in transmission are derived using the averaging method. The solutions show that the model produces limit cycles representing business cycles. The model with time delays in transmission is then solved numerically in order to investigate the role played by the coupling strength and coupling delay in transforming otherwise independent country-specific cycles into a synchronized business cycle. The degree of synchronization of the business cycle is shown to be positively related to the coupling strength. Moreover, coupling delays above a certain threshold play a desynchronizing role.
Notes
1In addition to the above main theories in terms of the exogenous versus endogenous explanation of the rise of international business cycles, sectoral specialization theory argues that regions that have similar sectoral structures will produce relatively similar business cycle fluctuations. Clark & Van Wincoop Citation(2001) and Kalemli-Ozcan et al. Citation(2001) have advanced empirical evidence on this phenomenon. Moreover, monetary integration theory argues that, in a monetary union, integrated monetary policies can cause macroeconomic fluctuations to become more symmetrical (Bayoumi & Eichengreen, Citation1993; Wynne & Koo, Citation2000).
2This problem is similar to the existence of time delays in signal processing in biological and physical systems (Campbell & Wang, Citation1998).