Limited participation in international business cycle models: A formal evaluation |
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| Affiliation: | 1. Department of Strategy and Policy, NUS Business School, Mochtar Riady Building, #7-76, 15 Kent Ridge Drive, Singapore 119245, Singapore;2. Vancouver School of Economics, University of British Columbia, 997 - 1873 East Mall, Vancouver, Canada BC V6T 1Z1;1. Department of Civil and Environmental Engineering, University of Waterloo, Waterloo, Ontario, Canada;2. Department of Civil and Water Engineering, Université Laval, Québec, Canada;1. Department of Information & Operations Management, Mays Business School, Texas A & M University, United States;2. Global Business Analysis, Oregon State University, United States;3. Division of Business, Xavier University of Louisiana, United States;4. Department of Logistics and Maritime Studies, Faculty of Business, The Hong Kong Polytechnic University, Hong Kong;5. Institute of Textiles and Clothing, The Hong Kong Polytechnic University, Hong Kong;6. Faculty of Business, The Hong Kong Polytechnic University, Hong Kong |
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| 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. |
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| Keywords: | International business cycles Incomplete markets Limited asset market participation |
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