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Intranational business cycles in the United States

  • Gregory D. Hess
  • Kwanho Shin

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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  1. 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.
  2. Chadha, Bankim & Prasad, Eswar, 1994. "Are prices countercyclical? Evidence from the G-7," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 239-257, October.
  3. Maurice Obstfeld., 1993. "Are Industrial-Country Consumption Risks Globally Diversified?," Center for International and Development Economics Research (CIDER) Working Papers C93-014, University of California at Berkeley.
  4. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  5. Tamim Bayoumi & Ronald Macdonald, 1995. "Consumption, Income, and International Capital Market Integration," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 552-576, September.
  6. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  7. Wilcox, David W, 1992. "The Construction of U.S. Consumption Data: Some Facts and Their Implications for Empirical Work," American Economic Review, American Economic Association, vol. 82(4), pages 922-41, September.
  8. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
  9. Andrew Atkeson & Tamim Bayoumi, 1993. "Do private capital markets insure regional risk? Evidence from the United States and Europe," Open Economies Review, Springer, vol. 4(3), pages 303-324, September.
  10. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  11. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  12. Gregory D. Hess & Kwanho Shin, 1995. "Intranational business cycles in the United States," Research Working Paper 95-07, Federal Reserve Bank of Kansas City.
  13. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers.
  14. 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.
  15. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  16. 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.
  17. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International business cycles: theory vs. evidence," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-29.
  18. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
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