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International Business Cycles with Complete Markets

  • Alexandre Dmitriev

    (University of Tasmania)

  • Ivan Roberts

    (Reserve Bank of Australia)

Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the 'international co-movement puzzle' (Baxter 1995) and the 'quantity anomaly' (Backus, Kehoe and Kydland 1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alone can account for the 'international co-movement puzzle'. Our model features time non-separable preferences that allow arbitrarily small changes in wealth to affect the supply of labour. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; and (ii) realistic cross-country correlations of consumption. It reduces the gap between international correlations of output and consumption, but fails to change their order. Unlike models with restricted international markets, ours shows little sensitivity to the parameterisation of the forcing process.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-08.

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Date of creation: Jun 2013
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Handle: RePEc:rba:rbardp:rdp2013-08
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