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Betting against your neighbor: a quantitative investigation

Author

Listed:
  • Finn Kydland
  • Irasema Alonso

Abstract

We investigate a two-country model of real business cycles along the lines of Backus, Kehoe, and Kydland (1992) with one new feature: country one residents are ambiguous [along the lines of Epstein (2001)] about the productivity shocks of country two and vice versa. The model is calibrated and solved numerically. In equilibrium, because domestic residents are ambiguity-averse, they bet against productivity abroad being high, thus lowering their holding of foreign equity relative to the benchmark, no-ambiguity model. Thus, consumption correlations across countries fall significantly. Moreover, foreign real investment behaves differently than in the benchmark mod

Suggested Citation

  • Finn Kydland & Irasema Alonso, 2004. "Betting against your neighbor: a quantitative investigation," 2004 Meeting Papers 443, Society for Economic Dynamics.
    • Handle: RePEc:red:sed004:443
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    More about this item

    Keywords

    ambiguity; international real business cycles; portfolio choice;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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