International business cycles with endogenous incomplete markets

Patrick J. Kehoe, Fabrizio Perri

Research output: Contribution to journalArticle

164 Citations (Scopus)

Abstract

Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.

Original languageEnglish (US)
Pages (from-to)907-928
Number of pages22
JournalEconometrica
Volume70
Issue number3
DOIs
StatePublished - Jan 1 2002

Fingerprint

Friction
International business cycles
Incomplete markets
Anomaly
Loans
Debt
Complete markets
Borrowing
Business cycle model
Discrepancy
Assets

Keywords

  • Credit markets imperfections
  • Debt constraints
  • Limited enforcement
  • Sovereign debt

Cite this

International business cycles with endogenous incomplete markets. / Kehoe, Patrick J.; Perri, Fabrizio.

In: Econometrica, Vol. 70, No. 3, 01.01.2002, p. 907-928.

Research output: Contribution to journalArticle

Kehoe, Patrick J. ; Perri, Fabrizio. / International business cycles with endogenous incomplete markets. In: Econometrica. 2002 ; Vol. 70, No. 3. pp. 907-928.
@article{71006928f2a045668e67f81ffd87e7f7,
title = "International business cycles with endogenous incomplete markets",
abstract = "Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.",
keywords = "Credit markets imperfections, Debt constraints, Limited enforcement, Sovereign debt",
author = "Kehoe, {Patrick J.} and Fabrizio Perri",
year = "2002",
month = "1",
day = "1",
doi = "10.1111/1468-0262.00314",
language = "English (US)",
volume = "70",
pages = "907--928",
journal = "Econometrica",
issn = "0012-9682",
publisher = "Wiley-Blackwell",
number = "3",

}

TY - JOUR

T1 - International business cycles with endogenous incomplete markets

AU - Kehoe, Patrick J.

AU - Perri, Fabrizio

PY - 2002/1/1

Y1 - 2002/1/1

N2 - Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.

AB - Backus, Kehoe, and Kydland (1992), Baxter and Crucini (1995), and Stockman and Tesar (1995) find two major discrepancies between standard international business cycle models with complete markets and the data: In the models, cross-country correlations are much higher for consumption than for output, while in the data the opposite is true; and cross-country correlations of employment and investment are negative, while in the data they are positive. This paper introduces a friction into a standard model that helps resolve these anomalies. The friction is that international loans are imperfectly enforceable; any country can renege on its debts and suffer the consequences for future borrowing. To solve for equilibrium in this economy with endogenous incomplete markets, the methods of Marcet and Marimon (1999) are extended. Incorporating the friction helps resolve the anomalies more than does exogenously restricting the assets that can be traded.

KW - Credit markets imperfections

KW - Debt constraints

KW - Limited enforcement

KW - Sovereign debt

UR - http://www.scopus.com/inward/record.url?scp=0036091163&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0036091163&partnerID=8YFLogxK

U2 - 10.1111/1468-0262.00314

DO - 10.1111/1468-0262.00314

M3 - Article

AN - SCOPUS:0036091163

VL - 70

SP - 907

EP - 928

JO - Econometrica

JF - Econometrica

SN - 0012-9682

IS - 3

ER -