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Chapter 5InternationalRealBusinessCyclesIn this chapter, we continue our study of models with perfect marketsin the absence of nominal rigidities but turn our attention understandinghow business cycles originate and how they are propagated andtransmitted from one country to another through current account imbalances.For this purpose, we will study real business cycle models.These are stochastic growth models that have been employed to addressbusiness cycle ßuctuations. As their name suggests, real business cyclemodels deal with the real side of the economy. They are Arrow—Debreumodels in which there is no role for money and their solution typicallyfocuses on solving the social planner’s problem.Analytic solutions to the stochastic growth model are available onlyunder special speciÞcations—for example when utility is time-separableand logarithmic and when capital fully depreciates each period. Complicationsbeyond these very simple structures require that the modelbe solved and evaluated numerically. We will work with durable capitalalong with the log utility speciÞcation. The resulting models aresimple enough for us to retain our intuition for what is going on butcomplicated enough so that we must solve them using numerical andapproximation methods.Real business cycle researchers evaluate their models using the calibrationmethod, which was outlined in chapter 4.4.4.137