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Closing international real business cycle models with restricted financial markets

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  • Boileau, Martin
  • Normandin, Michel

Abstract

Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. This conclusion is suspect, because it is based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions of the model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 5 (September)
Pages: 733-756

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:733-756

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Web page: http://www.elsevier.com/locate/inca/30443

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Cited by:
  1. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée.
  2. Bodenstein, Martin, 2010. "Trade elasticity of substitution and equilibrium dynamics," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1033-1059, May.
  3. Alok Johri & Marc-Andre Letendre & Daqing Luo, 2010. "Organizational Capital and the International Co-movement of Investment," Department of Economics Working Papers 2010-05, McMaster University.
  4. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
  5. Martin Bodenstein, 2006. "Closing open economy models," International Finance Discussion Papers 867, Board of Governors of the Federal Reserve System (U.S.).
  6. Michel Normandin & Bruno Powo Fosso, 2005. "Global versus Country-Specific Shocks and International Business Cycles," Cahiers de recherche 05-07, HEC Montréal, Institut d'économie appliquée.

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