INCOMPLETE ASSET MARKETS AND THE CROSS-COUNTRY CONSUMPTION CORRELATION PUZZLE

Recent International Real Business Cycle (IRBC) models that assume com plete international asset markets generate cross-country consumption c orrelations that are too high, when compared to the data. This paper s hows that an IRBC model in which asset markets are incomplete (in the sense that only debt contracts can be traded in asset markets) can gen erate cross-country consumption correlations that are markedly lower. This improvement is achieved without significantly worsening predictio ns for other key business cycle statistics.