International business cycles with complete markets

KehoeandPerri(2002) show that a two-country business cycle model with endogen- ously incomplete markets helps to resolve the‘‘international comovement puzzle’’ (Baxter, 1995) and the‘‘quantityanomaly’’(Backus etal.,1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alonecan account for the ‘‘internationalcomovementpuzzle’’. Our model features time nonseparable preferences tha tallow arbitrarily small wealth effects on labor supply. It matches the data by predicting(i)positivecross-country correlations of investment and hoursworked;(ii)realisticcross-country correlations of consumption. It reduces the gap between international correlations of output and consumption,but fails to change their order.Unlike models with restricted nternational markets,ours show little sensitivity to the parameterization of the forcing process.