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Intranational Business Cycles in the United StatesGregory D. Hess |
ABSTRACT 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. Keywords: Open Economy RBC Models, Risk Sharing, and Price and Quantity Anomalies. JEL Classification System: E20, E32, E31 Gregory D. Hess is an assistant professor of economics at the University of Kansas and a visiting scholar at the Federal Reserve Bank of Kansas City. Kwanho Shin is an assistant professor at the University of Kansas. The authors would like to thank Ken Heinecke and Stephen Monto for data collection. The opinions expressed are those of the authors and do not necessarily reflect views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.Back to top
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