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Closing International Real Business Cycle Models with Restricted Financial Markets

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  • Martin Boileau
  • Michel Normandin

Abstract

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. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial 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 explanation of 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 regarding key macroeconomic variables.

Suggested Citation

  • Martin Boileau & Michel Normandin, 2005. "Closing International Real Business Cycle Models with Restricted Financial Markets," Cahiers de recherche 0506, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0506
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    Cited by:

    1. Boileau, Martin & Normandin, Michel, 2008. "Dynamics of the current account and interest differentials," Journal of International Economics, Elsevier, pages 35-52.
    2. Soojae Moon, 2015. "The Losses from Trade Restrictions: Policy Dynamics with Firm Selection and Endogenous Markup," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 86-110, February.
    3. Gete, Pedro, 2015. "Housing demands, savings gluts and current account dynamics," Globalization and Monetary Policy Institute Working Paper 221, Federal Reserve Bank of Dallas, revised 01 Aug 2015.
    4. Bodenstein, Martin, 2013. "Equilibrium stability in open economy models," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 1-13.
    5. Evans, Martin D.D. & Hnatkovska, Viktoria, 2012. "A method for solving general equilibrium models with incomplete markets and many financial assets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1909-1930.
    6. Takashi Kano, 2013. "Exchange Rates and Fundamentals: Closing a Two-country Model," CAMA Working Papers 2013-62, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "Solving General Equilibrium Models with Incomplete Markets and Many Assets," NBER Technical Working Papers 0318, National Bureau of Economic Research, Inc.
    8. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, pages 511-523.
    9. Boileau, Martin & Normandin, Michel & Powo Fosso, Bruno, 2010. "Global versus country-specific shocks and international business cycles," Journal of Macroeconomics, Elsevier, pages 1-16.
    10. Nguyen, Quoc Hung, 2010. "International real business cycles : a re-visit," IDE Discussion Papers 269, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    11. Niels Gilbert & Sebastiaan Pool, 2016. "Sectoral allocation and macroeconomic imbalances in EMU," DNB Working Papers 536, Netherlands Central Bank, Research Department.
    12. Bodenstein, Martin, 2010. "Trade elasticity of substitution and equilibrium dynamics," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1033-1059, May.
    13. Seoane, Hernán D., 2015. "Near unit root small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 37-46.
    14. Dmitriev, Alexandre & Krznar, Ivo, 2012. "Habit Persistence And International Comovements," Macroeconomic Dynamics, Cambridge University Press, pages 312-330.
    15. Zi-Yi Guo, 2017. "International Real Business Cycle Models with Incomplete Information\," Proceedings of Economics and Finance Conferences 4507458, International Institute of Social and Economic Sciences.
    16. Bian, Timothy Yang & Gete, Pedro, 2015. "What drives housing dynamics in China? A sign restrictions VAR approach," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 96-112.
    17. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
    18. Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.
    19. KANO, Takashi, 2016. "Exchange Rates and Fundamentals: A General Equilibrium Exploration," Discussion paper series HIAS-E-19, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    20. Guo, Zi-Yi, 2017. "International Real Business Cycle Models with Incomplete Information," EconStor Preprints 168432, ZBW - German National Library of Economics.

    More about this item

    Keywords

    Incomplete markets; stationarity; cross-country correlations; wealth effects;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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