Betting against your neighbor: a quantitative investigation

Finn E. Kydland and Irasema Alonso

No 443, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate a two-country model of real business cycles along the lines of Backus, Kehoe, and Kydland (1992) with one new feature: country one residents are ambiguous [along the lines of Epstein (2001)] about the productivity shocks of country two and vice versa. The model is calibrated and solved numerically. In equilibrium, because domestic residents are ambiguity-averse, they bet against productivity abroad being high, thus lowering their holding of foreign equity relative to the benchmark, no-ambiguity model. Thus, consumption correlations across countries fall significantly. Moreover, foreign real investment behaves differently than in the benchmark mod

Keywords: ambiguity; international real business cycles; portfolio choice (search for similar items in EconPapers)
JEL-codes: F0 G1 D8 (search for similar items in EconPapers)
Date: 2004

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Persistent link: http://EconPapers.repec.org/RePEc:red:sed004:443

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