Linear Approximation Methods and International Real Business Cycles with Incomplete Asset Markets
AbstractMost 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.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1539.
Date of creation: 01 Aug 2000
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