Linear Approximation Methods and International Real Business Cycles with Incomplete Asset Markets

Most quantitative studies of international real business cycle (IRBC) models require the use of approximate solution methods. We solve an IRBC model with incomplete asset markets using King, Plosser and Rebelo's (1988) linear approximation method. We quantify the additional approximation error brought about by the existence of a unit root in the linear dynamic system and demonstrate that the symmetry of the model helps reduce this approximation error. A central finding is that the parametrizations which address the cross-country consumption correlation puzzle are precisely those where solutions may be least accurate.

Precautionary saving and portfolio allocation: DP by GMM

There is much research on consumption-savings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumption and portfolio choice, we adopt a semi-parametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parameters of approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically.portfolio theory, precautionary saving

Organizational Capital and the International Co-movement of Investment

A productivity shock leads to a large international transfer of capital and negative co-movement of investment in the typical two-country real business cycle model. Most recent models that attempt to reduce or remove this transfer produce unrealistically low investment volatility. We show that adding organizational capital to the technological environment of a relatively standard international business cycle model can ameliorate this problem. In addition we show that GHH preferences along with the above modification are sufficient to deliver positive cross-country correlations of consumption, hours, output and investment.International RBC; learning by doing; organizational capital; cross-country correlations; investment

Organizational Capital and the International Co-movement of Investment

A recent literature explores the macroeconomic implications of organizational capital (OC) and especially its ability to resolve discrepancies between existing models and data. This paper contributes to the OC literature by studying the effect of OC on international investment flows in the context of a two-country real business cycle model. The presence of OC introduces novel considerations into agents' investment decisions since current investment and future productivity levels are positively linked. These new considerations help bring the model closer to the data. In response to a productivity shock in one country, investment increases in both countries, producing positive international co-movement in investment, a feature of the data that several IRBC models fail to produce.international RBC, learning by doing, organizational capital, cross-country correlations, investment.

Precautionary saving and portfolio allocation: DP by GMM

There is much research on consumption-savings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumption and portfolio choice, we adopt a semi-parametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parameters of approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically