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Intranational business cycles in the United States

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  • Gregory D. Hess
  • Kwanho Shin

Abstract

We employ intranational data for the United States from 1978-1991 to re-explore two discrepancies between international real business cycle models and data (so called 'anomalies') that have been highlighted by Backus, Kehoe and Kydland (1993). The benefit to our approach is that the analysis of business cycles within one country is a natural experiment for understanding the 'anomalies' found in international business cycles since, as in the model, there are no tariffs or trade barriers between states in the U.S. and there is only one currency. ; Similar to the evidence for international business cycles, but contrary to the theory, we find that consumption is less contemporaneously correlated across states than output. This observed deficiency of intratemporal (contemporaneous) risk sharing is referred to as the `quantity anomaly'. Unlike the international data, however, we find that the `price anomaly' does not hold for intranational data; namely, the terms of trade for states are not more volatile than output or productivity shocks. Furthermore, we present additional evidence based on the relationships between labor earnings, non-labor earnings and government transfers which supports the view that the observed amount of intratemporal risk sharing is quite limited as compared to the observed amount of intertemporal risk sharing.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 95-07.

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Date of creation: 1995
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Handle: RePEc:fip:fedkrw:95-07

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Keywords: Business cycles ; Risk;

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References

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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  2. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  3. Michael B. Devereux & Allan W. Gregory & Gregor W. Smith, 1990. "Realistic Cross-Country Consumption Correlations in a Two-Country, Equilibrium, Business Cycle Model," Working Papers 774, Queen's University, Department of Economics.
  4. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  5. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  6. Andrew Atkeson & Tamim Bayoumi, 1993. "Do private capital markets insure regional risk? Evidence from the United States and Europe," Open Economies Review, Springer, vol. 4(3), pages 303-324, September.
  7. Cooley, T.F. & Ohanian, L.E., 1989. "The Cyclical Behavior Of Prices," RCER Working Papers 188, University of Rochester - Center for Economic Research (RCER).
  8. Ronald MacDonald & Tamim Bayoumi, 1994. "Consumption, Income, and International Capital Market Integration," IMF Working Papers 94/120, International Monetary Fund.
  9. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  10. Hess, Gregory D. & Shin, Kwanho, 1998. "Intranational business cycles in the United States," Journal of International Economics, Elsevier, vol. 44(2), pages 289-313, April.
  11. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, vol. 39(2), pages 253-274, February.
  12. Wilcox, David W, 1992. "The Construction of U.S. Consumption Data: Some Facts and Their Implications for Empirical Work," American Economic Review, American Economic Association, vol. 82(4), pages 922-41, September.
  13. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International business cycles: theory vs. evidence," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-29.
  14. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  15. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  16. Maurice Obstfeld, 1994. "Are Industrial-Country Consumption Risks Globally Diversified?," NBER Working Papers 4308, National Bureau of Economic Research, Inc.
  17. Eswar Prasad & Bankim Chadha, 1994. "Are Prices Countercyclical? Evidence from the G-7," IMF Working Papers 94/91, International Monetary Fund.
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