Limited participation in international business cycle models: A formal evaluationXiaodan Gao, Viktoria Hnatkovska () and Vadim Marmer () Journal of Economic Dynamics and Control, 2014, vol. 39, issue C, 255-272 Abstract: In this paper, we argue that limited asset market participation (LAMP) plays an important role in explaining international business cycles. We show that when LAMP 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 statistical framework of Vuong (1989) to DSGE models. Using this methodology, 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 as well as 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 technology shocks. Keywords: International business cycles; Incomplete markets; Limited asset market participation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:39:y:2014:i:c:p:255-272 DOI: 10.1016/j.jedc.2013.12.006 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.