International business cycles with endogenous incomplete markets

Patrick Kehoe and Fabrizio Perri

No 265, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: 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.

Keywords: Credit; Equilibrium (Economics) - Mathematical models; Loans, Foreign; Business cycles - Econometric models (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (28)

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Related works:
Journal Article: International Business Cycles with Endogenous Incomplete Markets (2002)
Working Paper: International Business Cycles with Endogenous Incomplete Markets (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:265

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