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Crazy Explanations of International Business Cycles

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  • Guo, Jang-Ting
  • Sturzenegger, Federico

Abstract

International real business cycle models have been unable to provide a good explanation for the consumption-output anomaly: in theoretical economies, consumption is more strongly correlated across countries than is output, whereas the opposite is the case in the data. This paper examines an increasing returns-to-scale model in which the economy is subject to 'belief' shocks that affect the consumption Euler equations rather than productivity. Under the assumption that there are no contingent claim markets on the realizations of 'sunspots,' the belief-driven model can account for the consumption-output anomaly even with a separable period utility function. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Guo, Jang-Ting & Sturzenegger, Federico, 1998. "Crazy Explanations of International Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 111-133, February.
  • Handle: RePEc:ier:iecrev:v:39:y:1998:i:1:p:111-33
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    Cited by:

    1. Tarek Coury & Yi Wen, 2009. "Global indeterminacy in locally determinate real business cycle models," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 49-60.
    2. Wen, Yi, 2001. "Demand-Driven Business Cycles: Explaining Domestic and International Comovements," Working Papers 01-18, Cornell University, Center for Analytic Economics.
    3. Kollmann, Robert, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," Journal of International Economics, Elsevier, vol. 55(2), pages 243-262, December.
    4. Daniel Farhat, 2009. "Endogenous Labor Supply, Heterogeneous Firms and International Business Cycles," Working Papers 0909, University of Otago, Department of Economics, revised Sep 2009.
    5. Farmer, Roger E. A. & Jang-Ting, Guo, 1995. "The econometrics of indeterminacy: an applied study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 225-271, December.
    6. Wei Xiao, 2001. "Can Indeterminacy Resolve the Consumption Correlation Puzzle?," Computing in Economics and Finance 2001 209, Society for Computational Economics.
    7. Francesco Busato, 2004. "Relative Demand Shocks," Economics Working Papers 2004-11, Department of Economics and Business Economics, Aarhus University.
    8. Nadenichek, Jon, 2007. "Consumer confidence and economic stagnation in Japan," Japan and the World Economy, Elsevier, vol. 19(3), pages 338-346, August.
    9. Fukuda, Shin-ichi, 2004. "Extraneous shocks and international linkage of business cycles in a two-country monetary model," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 389-409, July.
    10. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," NBER Working Papers 4493, National Bureau of Economic Research, Inc.
    11. Daniel Farhat, 2010. "Capital Accumulation, Non-traded Goods and International Macroeconomic Dynamics with Heterogeneous Firms," Working Papers 1002, University of Otago, Department of Economics, revised May 2010.
    12. Nadenichek, Jon, 1999. "Consumer durable goods in an international real business cycle framework," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(2), pages 233-247.
    13. Tarek Coury & Yi Wen, 2007. "Global indeterminacy in locally determinate RBC models," Working Papers 2007-029, Federal Reserve Bank of St. Louis.

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