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Realistic Cross-Country Consumption Correlations in a Two-Country, Equilibrium, Business Cycle Model

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  • Michael B. Devereux
  • Allan W. Gregory
  • Gregor W. Smith

Abstract

A well-known feature of one-good, multi-agent, Arrow-Debreu economies with identical additively-separable, homothetic preferences is that the consumptions of all agents are perfectly correlated. Such economies are widely used in interpreting business cycles but seem to be inconsistent with observed cross-country correlations of aggregate consumption. This paper provides an example of a two-country real business cycle model in which preferences are not separable between consumptions and labor supply. The model has a simple closed-form solution, and allows for fluctuations in labor supply in equilibrium. Moreover, it generates correlations between national consumption rates which are close to some of those observed in historical data.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_774.pdf
File Function: First version 1990
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 774.

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Date of creation: Feb 1990
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Handle: RePEc:qed:wpaper:774

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