Closing International Real Business Cycle Models With Restricted Financial Markets

Topics:
Organization
Tags:
Finance,
Financial,
Financial Accounting,
Financial Market,
HEC Montreal
Source:
HEC Montreal

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Overview: 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. It is shown 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. The authors found, however, that the modifications affect the quantitative predictions regarding key macroeconomic variables.

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Format: PDF | Size: 734KB | Date: Mar 2005 | Pages: 40

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