TY  - JOUR
AU  - Kehoe,Patrick J.
AU  - Perri,Fabrizio
TI  - International Business Cycles with Endogenous Incomplete Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7870
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7870
L1  - http://www.nber.org/papers/w7870.pdf
N1  - Author contact info:
Patrick Kehoe
Research Department
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN  55480-0291
Tel: 612/204-5525
Fax: 612/204-5515
E-Mail: pkehoe@res.mpls.frb.fed.us

Fabrizio Perri
Universita' Bocconi
Department of Economics
Via Roentgen, 1 - 20136
Milano, Italy
Tel: +39 02 5836 5793
E-Mail: fperri@umn.edu
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.
ER  -