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International business cycles: theory vs. evidence

  • David K. Backus
  • Patrick J. Kehoe
  • Finn E. Kydland

This article reviews recent work comparing properties of international business cycles with those of dynamic general equilibrium models. Two discrepancies between theory and data are described. One concerns the correlation across countries of fluctuations in consumption, output, and productivity: in the data, the output correlation is generally the largest; in theoretical economies, however, for a wide range of parameter values, the consumption correlation is the largest. The other discrepancy concerns relative price movements: the standard deviation of the terms of trade is considerably larger in the data than in theoretical economies. Also described here are several changes in theoretical structure that researchers have attempted, without success, to bring the theory and the data closer together. This article is a revision of a chapter prepared for a forthcoming book, Frontiers of Business Cycle Research, edited by Thomas F. Cooley, to be published by Princeton University Press.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1993)
Issue (Month): Fall ()
Pages: 14-29

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Handle: RePEc:fip:fedmqr:y:1993:i:fall:p:14-29:n:v.17no.4
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  1. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  3. Lapham, Beverly J., 1995. "A dynamic general equilibrium analysis of deviations from the laws of one price," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1355-1389, November.
  4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  5. 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.
  6. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
  7. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, June.
  8. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  9. 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.
  10. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 299-316, June.
  11. King, R.G. & Rebelo, S.T., 1989. "Low Frequency Filtering And Real Business Cycles," RCER Working Papers 205, University of Rochester - Center for Economic Research (RCER).
  12. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  13. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
  14. Finn, Mary G., 1990. "On savings and investment dynamics in a small open economy," Journal of International Economics, Elsevier, vol. 29(1-2), pages 1-21, August.
  15. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-96, December.
  16. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  17. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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