A MULTICOUNTRY REAL BUSINESS-CYCLE MODEL WITH HETEROGENEOUS AGENTS

A multi-country real business cycle model is developed capturing two i mportant aspects of heterogeneity found in household survey data: only a small fraction of the population holds stock, and a significant fra ction of non-stockholders are borrowing constrained. The model is appl ied to data for twenty OECD countries. It generates cross-country cons umption correlations consistent with those observed in the data. Poten tial welfare gains from international portfolio diversification by sto ckholders are large, leaving the observed ''home bias'' as a significa nt puzzle. The model can also account for the finding in U.S. data tha t consumption of stockholders is more volatile than that of non-stockh olders.