International Business Cycles with Endogenous Incomplete Markets

45 Pages Posted: 18 Sep 2000 Last revised: 18 Oct 2010

See all articles by Patrick J. Kehoe

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

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.

Suggested Citation

Kehoe, Patrick J. and Perri, Fabrizio, International Business Cycles with Endogenous Incomplete Markets (September 2000). NBER Working Paper No. w7870. Available at SSRN: https://ssrn.com/abstract=241371

Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
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University of Minnesota - Twin Cities - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics ( email )

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New York, NY 10003
United States
212-998-0251 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~fperri/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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