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Title: Closing International Real Business Cycle Models with Restricted Financial Markets
Authors: Boileau, Martin
Normandin, Michel
Keywords: Incomplete markets
stationarity
cross-country correlations
wealth effects
Issue Date: 2005-03
Series/Report no.: Cahiers du CIRPÉE;05-06
Abstract: Several authors argue that international real business cycle (IRBC) models with incomplete financial markets offer a good explanation of the ranking of cross-country correlations. Unfortunately, this conclusion is suspect, because it is commonly based on an analysis of the near steady state dynamics using a linearized system of equations. The baseline IRBC model with incomplete financial markets does not possess a unique deterministic steady state and, as a result, its linear system of difference equations is not stationary. We show that the explanation of the ranking of cross-country correlations is robust to modifications that ensure a unique steady state and a stationary system of linear difference equations. We find, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables.
URI: http://132.203.59.36/CIRPEE/cahierscirpee/2005/files/CIRPEE05-06.pdf
https://depot.erudit.org/id/002036dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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