Incomplete asset markets and the cross-country consumption correlation puzzle

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