Closing International Real Business Cycle Models with Restricted Financial Markets

Martin Boileau and Michel Normandin ()

Cahiers de recherche from CIRPEE

Abstract: Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables.

Keywords: Incomplete markets; stationarity; cross-country correlations; wealth effects (search for similar items in EconPapers)
JEL-codes: F32 G15 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-bec and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Closing international real business cycle models with restricted financial markets (2008)
Working Paper: Closing International Real Business Cycle Models with Restricted Financial Markets (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0506

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