International business cycles with endogenous incomplete markets

Patrick J. Kehoe, Fabrizio Perri

Research output: Contribution to journalArticlepeer-review

183 Scopus citations


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
Issue number3
StatePublished - 2002

Bibliographical note

Copyright 2017 Elsevier B.V., All rights reserved.


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


Dive into the research topics of 'International business cycles with endogenous incomplete markets'. Together they form a unique fingerprint.

Cite this