N°23-43: Ricardian Business Cycles

This paper presents a dynamic stochastic general equilibrium model of Ricardian business cycles. Our model is Ricardian because countries (or, equivalently, regions) trade to take advantage of their comparative advantages. Their relative efficiencies, however, change over time stochastically. Similarly, country-specific shocks to demand, supply, and investment efficiency induce countries to engage in intra- and intertemporal substitutions in non-durable consumption, investment, services, and trade, generating business cycles. Finally, all agents have rational expectations about the stochastic components of the model. We solve the model globally using deep neural networks and calibrate it to the U.S., Europe, and China. Our quantitative results highlight the role of trading costs in shaping the responses of the economy to different shocks.