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Intranational business cycles in the United States

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Author Info
Gregory D. Hess
Kwanho Shin

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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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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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  1. Gregory D. Hess, 2002. "Marriage and Consumption Insurance: What's Love Got To Do With It?," Claremont Colleges Working Papers 2002-15, Claremont Colleges. [Downloadable!]
    Other versions:
  2. Hanno Lustig, 2004. "Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective (joint with Stijn Van Nieuwerburgh), forthcoming Journal of Finance," UCLA Economics Online Papers 300, UCLA Department of Economics. [Downloadable!]
  3. Athanasios Tagkalakis, 2006. "The effects of macroeconomic policy shocks on the UK labour market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 229-244. [Downloadable!]
  4. Ralph Chami & Gregory Hess, 2002. "For Better or For Worse? State-Level Marital Formation and Risk Sharing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Zahir, Antia & Djoudad, Ramdane & St-Amant, Pierre, 1999. "Canada’s Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms," Working Papers 99-17, Bank of Canada. [Downloadable!]
  6. Stafano Athanasoulis & Eric van Wincoop, 1998. "Risksharing within the United States: what have financial markets and fiscal federalism accomplished?," Research Paper 9808, Federal Reserve Bank of New York. [Downloadable!]
  7. Stephane Pallage & Michel A. Robe, 2002. "The States vs. the states: On the Welfare Cost of Business Cycles in the U.S," Cahiers de recherche du Département des sciences économiques, UQAM 20-17, Université du Québec à Montréal, Département des sciences économiques, revised Oct 2002. [Downloadable!]
    Other versions:
  8. Mathias Hoffmann, 2008. "The Lack of International Consumption Risk Sharing: Can Inflation Differentials and Trading Costs Help Explain the Puzzle?," Open Economies Review, Springer, vol. 19(2), pages 183-201, April. [Downloadable!] (restricted)
  9. Hanno Lustig & Stijn Van Nieuwerburgh, 2002. "Housing Collateral, Consumption Insurance and Risk Premia," Macroeconomics 0211008, EconWPA. [Downloadable!]
  10. Michael ARTIS & Mathias HOFFMANN, 2003. "Home Bias and the Structure of International and Regional Business Cycles," Economics Working Papers ECO2003/15, European University Institute. [Downloadable!]
  11. Jong-Wha Lee & Kwanho Shin, 2004. "Exchange Rate Regimes and Economic Linkages," International Finance 0409006, EconWPA. [Downloadable!]
  12. Hess, Gregory & Shin, Kwanho, 2006. "Understanding the Backus-Smith Puzzle: It’s the (Nominal) Exchange Rate, Stupid," MPRA Paper 696, University Library of Munich, Germany. [Downloadable!]
  13. Vincent Labhard & Michael Sawicki, . "International and intranational consumption risk sharing: the evidence for the United Kingdom and OECD," Bank of England working papers 302, Bank of England. [Downloadable!]
  14. Marco Del Negro, 2000. "Asymmetric shocks among U.S. states," Working Paper 2000-27, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  15. Hanno Lustig & Stijn Van Nieuwerburgh, 2004. "How Much Does Household Collateral Constrain Regional Risk Sharing?," NBER Working Papers 10505, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  16. Barbara Pfeffer, 2008. "Do regional Trade and Specialization drive intra-regional Risk-Sharing?," MAGKS Papers on Economics 200813, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
  17. Sebnem Kalemli-Ozcan & Bent E. Sorensen & Oved Yosha, 2004. "Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe," Working Papers 2004-05, Department of Economics, University of Houston. [Downloadable!]
    Other versions:
  18. Attilio Gardini & Giuseppe Cavaliere & Luca Fanelli, 2006. "Risk sharing, avversione al rischio e stabilizzazione delle economie regionali in Italia," Quaderni di Dipartimento 0, Department of Statistics, University of Bologna. [Downloadable!]
  19. Hanno Lustig, 2004. "How much Does Household Collateral Constrain Regional Risk Sharing? (joint with Stijn Van Nieuwerburgh) (updated February 2006)," UCLA Economics Online Papers 302, UCLA Department of Economics. [Downloadable!]
  20. Sebnem Kalemli-Ozcan & Bent E. Sorensen & Oved Yosha, 1999. "Industrial specialization and the asymmetry of shocks across regions," Research Working Paper 99-06, Federal Reserve Bank of Kansas City. [Downloadable!]
  21. Michael A. Kouparitsas & Daisuke J. Nakajima, 2006. "Are U.S. and Seventh District business cycles alike?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 45-60. [Downloadable!]
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