International business cycles with complete markets

Alexandre Dmitriev, Ivan Roberts

    Research output: Contribution to journalArticle

    Abstract

    Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the "international comovement puzzle" (. Baxter, 1995) and the "quantity anomaly" (. Backus et al., 1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alone can account for the "international comovement puzzle". Our model features time nonseparable preferences that allow arbitrarily small wealth effects on labor supply. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; (ii) realistic cross-country correlations of consumption. It reduces the gap between international correlations of output and consumption, but fails to change their order. Unlike models with restricted international markets, ours show little sensitivity to the parameterization of the forcing process.
    Original languageEnglish
    Pages (from-to)862-875
    JournalJournal of Economic Dynamics and Control
    Volume36
    Issue number6
    DOIs
    Publication statusPublished - 2012

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