The paper by Backus, Kehoe, and Kydland examines whether a two-country real business cycle (RBC) model can simultaneously account for both domestic and international aspects of business cycles. They document discrepancies between theoretical predictions and empirical data, particularly in the correlations of consumption and output across countries. In closed economies, RBC theory has successfully explained many features of postwar U.S. business cycles. However, when extended to open economies, the model shows different dynamics. In closed economies, consumption is smoother and less correlated with output compared to the data, while investment is more volatile and more correlated with output. In open economies, consumption is less variable and less correlated with output, while investment is more variable and more correlated with output. The trade balance is more variable in the model than in major developed economies, and the correlation between output fluctuations across countries is negative in the model, contrary to the data. The authors explore the impact of international risk sharing and borrowing on these discrepancies. They introduce small transportation costs and eliminate international borrowing to reduce the differences between the model and the data. The results suggest that the large cross-country correlation of consumption relative to output is robust, while other discrepancies can be mitigated by allowing for small trading frictions or eliminating international borrowing. The study contributes to the growing body of research on international business cycles using dynamic general equilibrium theory. It provides quantitative insights into the properties of international business cycles and highlights the importance of international markets in shaping economic fluctuations.The paper by Backus, Kehoe, and Kydland examines whether a two-country real business cycle (RBC) model can simultaneously account for both domestic and international aspects of business cycles. They document discrepancies between theoretical predictions and empirical data, particularly in the correlations of consumption and output across countries. In closed economies, RBC theory has successfully explained many features of postwar U.S. business cycles. However, when extended to open economies, the model shows different dynamics. In closed economies, consumption is smoother and less correlated with output compared to the data, while investment is more volatile and more correlated with output. In open economies, consumption is less variable and less correlated with output, while investment is more variable and more correlated with output. The trade balance is more variable in the model than in major developed economies, and the correlation between output fluctuations across countries is negative in the model, contrary to the data. The authors explore the impact of international risk sharing and borrowing on these discrepancies. They introduce small transportation costs and eliminate international borrowing to reduce the differences between the model and the data. The results suggest that the large cross-country correlation of consumption relative to output is robust, while other discrepancies can be mitigated by allowing for small trading frictions or eliminating international borrowing. The study contributes to the growing body of research on international business cycles using dynamic general equilibrium theory. It provides quantitative insights into the properties of international business cycles and highlights the importance of international markets in shaping economic fluctuations.