Document Type

Working Paper

Publication Date

3-21-2008

Working Paper Number

WP #11006, March 2008; Old working paper #32800

Abstract

Backus, Kehoe, and Kydland (International Real Business Cycles, JPE, 100 (4), 1992) documented several discrepancies between the observed post-war business cycles of developed countries and the predictions of a two-country, complete-market model. The main discrepancy dubbed as the quantity anomaly, that cross-country consumption correlations are higher than that of output in the model as opposed to the data, has remained a central puzzle in international economics. The main thesis of this paper is that when the standard two-country model with traded and non-traded goods and complete financial markets, as in Stockman and Tesar (Tastes and Technology in a Two Country Model of the Business Cycles: Explaining International Comovements, 85 (1), AER, 1995) is extended to include capital goods sectors that utilize both traded and non-traded goods as intermediates, and when the non-traded aggregate is reclassified to include distribution and transportation services, the model produces the correct ordering of the cross-country correlations of consumption and output.

JEL Classification

F32, F34, F41

File Format

application/pdf

Length

36 pages

Included in

Economics Commons

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