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Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model

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

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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  • Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 3-16, February.
    • Handle: RePEc:eee:jimfin:v:11:y:1992:i:1:p:3-16
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