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International business cycles with complete markets

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  • Dmitriev, Alexandre
  • Roberts, Ivan

Abstract

Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the “international comovement puzzle” (Baxter, 1995) and the “quantity anomaly” (Backus et al., 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 comovement puzzle”. Our model features time nonseparable preferences that allow arbitrarily small wealth effects on labor supply. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; (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 show little sensitivity to the parameterization of the forcing process.

Suggested Citation

  • Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
  • Handle: RePEc:eee:dyncon:v:36:y:2012:i:6:p:862-875
    DOI: 10.1016/j.jedc.2011.12.006
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    3. Deniz Nebioglu & Ayca Ebru Giritligil, 2018. "Wealth Effects and Labor Supply: An Experimental Study," BELIS Working Papers 2018-01, BELIS, Istanbul Bilgi University.
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    6. Heiberger, Christopher & Maußner, Alfred, 2020. "Perturbation solution and welfare costs of business cycles in DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 113(C).
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    8. Jiang, Mingming, 2016. "By force of demand: Explaining cyclical fluctuations of international trade and government spending," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 249-267.
    9. 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.

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    More about this item

    Keywords

    Time nonseparable preferences; Wealth effects; International business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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