Faraway, so close! Technology diffusion and firm heterogeneity in the medium term cycle of advanced economies (Updated May 2019)
Series: Working Papers. 1835.
Author: Mónica Correa-López and Beatriz de Blas.
Published in: Journal of International Economics
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Abstract
Large US firms, by diffusing embodied technology through trade in intermediates, appear
to drive Europe’s output over the medium term. We develop a two-country model of
endogenous growth in varieties, cross-country firm heterogeneity and trade to match
this evidence. A US TFP slowdown generates a pronounced recession in Europe, while
a negative investment-specific shock also imparts a protracted recession in the US since
GDP and firm productivity stay below trend beyond a decade. Heterogeneous firms, with
endogenously changing productivity cut-offs, and the responses of innovators and adopters
determine medium-term adjustment, as import switching processes unfold.