News and business cycles in open economies

We study the effects of news about future total factor productivity (TFP) in a small open economy. We show that an open-economy version of the neoclassical model produces a recession in response to good news about future TFP. We propose an open-economy model that generates comovement in response to TFP news. The key elements of our model are a weak short-run wealth effect on the labor supply an…