Quarterly Review 1742

International Business Cycles: Theory vs. Evidence

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
David K. Backus
Finn E. Kydland

Fall 1993

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.

Published In: Frontiers of business cycle research (1995, pp. 331-356)

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