CRAZY EXPLANATIONS OF INTERNATIONAL-BUSINESS CYCLES

International real business cycle models have been unable to provide a good explanation for the consumption-output anomaly: in theoretical e conomies, consumption is more strongly correlated across countries tha n is output, whereas the opposite is the case in the data This paper e xamines an increasing returns-to-scale model in which the economy is s ubject to 'belief' shacks that affect the consumption Euler equations rather than productivity. Under the assumption that there are no conti ngent claim markets on the realizations of 'sunspots,' the belief-driv en model can account for the consumption-output anomaly even with a se parable period utility function.