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International business cycles with endogenous incomplete markets

Kehoe, PJ; Perri, F; (2002) International business cycles with endogenous incomplete markets. Econometrica , 70 (3) pp. 907-928. 10.1111/1468-0262.00314. Green open access

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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.

Type: Article
Title: International business cycles with endogenous incomplete markets
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/1468-0262.00314
Publisher version: https://doi.org/10.1111/1468-0262.00314
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. The copyright to this article is held by the Econometric Society, http://www.econometricsociety.org/. It may be downloaded, printed and reproduced only for personal or classroom use. Absolutely no downloading or copying may be done for, or on behalf of, any for-profit commercial firm or for other commercial purpose without the explicit permission of the Econometric Society.
Keywords: Debt constraints, limited enforcement, sovereign debt, credit markets imperfections
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054405
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