International business cycles with endogenous incomplete markets

Patrick J. Kehoe, Fabrizio Perri

Research output: Contribution to journalArticlepeer-review

166 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)907-928
Number of pages22
JournalEconometrica
Volume70
Issue number3
DOIs
StatePublished - 2002

Keywords

  • Credit markets imperfections
  • Debt constraints
  • Limited enforcement
  • Sovereign debt

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