Linear approximation methods and international real business cycles with incomplete asset markets
نویسندگان
چکیده
Most quantitative studies of international real business cycle (IRBC) models require the use of approximate solution methods. We solve an IRBC model with incomplete asset markets using King, Plosser and Rebelo’s (1988) linear approximation method. We quantify the additional approximation error brought about by the existence of a unit root in the linear dynamic system and demonstrate that the symmetry of the model helps reduce this approximation error. A central finding is that the parametrizations which address the cross-country consumption correlation puzzle are precisely those where solutions may be least accurate. JEL classification: E32, C63, F41
منابع مشابه
Incomplete asset markets and the cross-country consumption correlation puzzle
Recent International Real Business Cycle (IRBC) models that assume complete international asset markets generate cross-country consumption correlations that are too high, when compared to the data. This paper shows that an IRBC model in which asset markets are incomplete (in the sense that only debt contracts can be traded in asset markets) can generate cross-country consumption correlations th...
متن کاملThe cost of business cycles for unskilled workers
This paper reconsiders the cost of business cycles under incomplete markets. Primarily, we focus on the heterogeneity in the cost of business cycles among agents with different skill levels. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We ex...
متن کاملBoard of Governors of the Federal Reserve System International Asset Markets and Real Exchange Rate Volatility International Asset Markets and Real Exchange Rate Volatility *
The real exchange rate is very volatile relative to major macroeconomic aggregates and its correlation with the ratio of domestic over foreign consumption is negative (BackusSmith puzzle). These two observations constitute a puzzle to standard international macroeconomic theory. This paper develops a two country model with complete asset markets and limited enforcement for international financi...
متن کاملAn Introduction to General Equilibrium with Incomplete Asset Markets*
The theory of general equilibrium with incomplete asset markets (GEI) studies the pricing of securities and commodities, and the interactions of perfectly competitive asset markets and commodity markets in determining consumption and investment. Since financial economics is fundamentally concerned with the pricing of securities, and since macroeconomics is fundamentally concerned with the real ...
متن کاملTime-Separability, Wealth Effects and International Business Cycles
This paper addresses the international comovement puzzle. International real business cycle models tend to predict negative cross-country correlations of investment and employment. In the data these correlations are positive. To reconcile the theory with the data the literature has resorted to financial frictions and new sources of disturbances. We show that a model driven by productivity shock...
متن کامل