Government Consumption and Private Consumption Correlations
This paper examines whether the introduction of government consumption expenditure in a standard one good model of the international real business cycle is sufficient to reconcile the theory with the existing pattern of international consumption and output correlations. I calibrate the model to two different pairs of countries and generate the simulated distribution of consumption and output correlations implied by several specifications of the model. It is shown that the model can account for existing international consumption correlations only under very specific assumptions about the size of effect of government expenditure on agents' utility or the variability of government expenditure shocks. Crucial parameters are identified and the sensitivity of the results discussed.
Government expenditure, risk sharing, consumption correlations, international real business cycles
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