This paper finds a solution to some of the discrepancies between the data and what standard complete markets models predict. Specifically, those related to the cross-country correlations of consumption, output and factors of production. I match the data and get positive cross country comovements of investment and employment, and a cross-country correlation of consumption lower than that of output. I do this through the introduction of a “demand channel†given by trade in goods, credit market frictions and a non-competitive banking industry, into an otherwise standard two-country RBC model. In this model financial flows international mobility is reduced appealing to arbitrage arguments that guide saving decisions in a decentralized economy. Equity flows are not allowed in this setup
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
188.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:188
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Find related papers by JEL classification: E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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