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.
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Length: Date of creation: Sep 2000 Date of revision: Handle: RePEc:nbr:nberwo:7870
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[Downloadable!] (restricted)
Other versions:
Eaton, J. & Fernandez, R., 1995.
"Sovereign Debt,"
Papers
37, Boston University - Department of Economics.
Jonathan Eaton & Raquel Fernandez, 1995.
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[Downloadable!] (restricted)
Albert Marcet & Ramon Marimon, 1994.
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[Downloadable!]
Chari, V V & Kehoe, Patrick J, 1990.
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Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 783-802, August.
[Downloadable!] (restricted)
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V.V. Chari & Patrick J. Kehoe, 1989.
"Sustainable plans,"
Staff Report
122, Federal Reserve Bank of Minneapolis.
[Downloadable!]
Baxter, Marianne & Crucini, Mario J, 1995.
"Business Cycles and the Asset Structure of Foreign Trade,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.