Macroeconomics

Quantum mechanics

Labour economics

Business cycle

Shock (circulatory)

Medium term

Economics

Market economy

Endogenous growth theory

Business

International trade

Slowdown

Economic geography

Total factor productivity

Thermodynamics

Physics

Recession

Diffusion

Politics

Political science

Monetary economics

Productivity

Internal medicine

Human capital

Great recession

Industrial organization

Medicine

International economics

Economic growth

Term (time)

Investment (military)

SSRN Electronic Journal

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.

Faraway, So Close! Technology Diffusion and Firm Heterogeneity in the Medium Term Cycle of Advanced Economies