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International Business Cycles: Theory vs. Evidence

Quarterly Review 1742 | Fall 1993

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Authors

David K. Backus

Finn E. Kydland

International Business Cycles: Theory vs. Evidence

Abstract

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.


Published In: _Frontiers of Business Cycle Research_ (1995, pp. 331-356). The article appears here with the permission of Princeton University Press.