nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒02‒08
three papers chosen by
Martin Berka
Victoria University of Wellington

  1. Limited Participation in International Business Cycle Models: A Formal Evaluation By Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
  2. The Risk Premium and Long-Run Global Imbalances By YiLi Chien; Kanda Naknoi
  3. Financial Globalization and Animal Spirits By Kunieda, Takuma; Shibata, Akihisa

  1. By: Gao, Xiaodan; Hnarkovska, Viktoria; Marmer, Vadim
    Abstract: In this paper we study the role of limited asset market participation (LAMP) for international business cycles. We show that when limited participation is introduced into an otherwise standard model of international business cycles, the performance of the model improves significantly, especially in matching cross-country correlations. To perform formal evaluation of the models we develop a novel statistical procedure that adapts the test of Vuong (1989) to DSGE models and accounts for the possibility that models are misspecified. Based on this test we show that the improvements brought out by LAMP are statistically significant, leading a model with LAMP to outperform a representative agent model. Furthermore, when LAMP is introduced, a model with complete markets is found to do better than a model with no trade in financial assets - a well-known favorite in the literature. Our results remain robust to the inclusion of investment specific technical change.
    Keywords: international business cycles, incomplete markets, limited asset market participation
    JEL: F3 F4
    Date: 2012–01–22
  2. By: YiLi Chien; Kanda Naknoi
    Abstract: Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future.
    Keywords: Global Imbalances; External Account; Risk Premium; Asset Pricing; Limited Participation
    JEL: E21 F32 F41 G12
    Date: 2011–10
  3. By: Kunieda, Takuma; Shibata, Akihisa
    Abstract: Using a multi-country general equilibrium model, we demonstrate that when agents face credit constraints in an international financial market, rational expectations, which are ex-post heterogeneous between countries, cause business fluctuations. If the international financial market becomes perfect, only a unique perfect foresight equilibrium is obtained, implying that no business fluctuations appear.
    Keywords: Business fluctuations; Financial globalization; Sunspots; Heterogeneous agents; Rational expectations
    JEL: F49 E44 F36
    Date: 2012–01–22

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