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Closing international real business cycle models with restricted financial markets

Listed author(s):
  • Boileau, Martin
  • Normandin, Michel

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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File URL: http://www.sciencedirect.com/science/article/pii/S0261-5606(08)00036-3
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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