International Business Cycles with Endogenous Incomplete Markets / Patrick J. Kehoe, Fabrizio Perri.

Format:

Book

Author/Creator:

Kehoe, Patrick J.

Contributor:

National Bureau of Economic Research.

Perri, Fabrizio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7870.

NBER working paper series no. w7870

Language:

English

Subjects (All):

Business cycles--Econometric models.

Business cycles.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Cambridge, Massachussetts : National Bureau of Economic Research, [2000]

Summary:

Backus, Kehoe and Kydland (1992), Baxter and Crucini (1995) and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.

Notes:

Print version record

September 2000.