Limited Participation in International Business Cycle Models: A Formal Evaluation
AbstractIn this paper we study the role of limited asset market participation (LAMP) for international business cycles. We show that when limited participation is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of Vuong (1989) to DSGE models and accounts for the possibility that models are misspecified. Based on this test we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do better than a model with no trade in financial assets -- a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technical change.
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Bibliographic InfoPaper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number vadim_marmer-2012-1.
Length: 38 pages
Date of creation: 24 Jan 2012
Date of revision: 24 Jan 2012
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Web page: http://www.economics.ubc.ca/
international business cycles; incomplete markets; limited asset market participation;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-08 (All new papers)
- NEP-CBA-2012-02-08 (Central Banking)
- NEP-DGE-2012-02-08 (Dynamic General Equilibrium)
- NEP-OPM-2012-02-08 (Open Economy Macroeconomic)
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