Abstract
International Real Business Cycle (IRBC) models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series. Empirical tests with data for the US, Japan, France, UK, Italy, Canada and Sweden suggest that neither the trend behavior nor high-frequency movements of consumption and real exchange rates are well explained by IRBC models with complete markets. It appears, however, that high-frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk-free bonds.
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