I have built a 2-country DSGE model in which the household accumulates capital and provides capital and labor effort to his local intermediate firms. The household has the possibility to buy domestic and foreign bonds. To close the economy, foreign bond holdings come along with some costs.
Is my guess correct, that such a model shows complete bond markets but incomplete asset as well as incomplete labor markets because the household is allowed to provide capital and labor effort only in his home country?
When I simulate the model (1% home productivity shock, same home and foreign parameterization), the exchange rate under no bias in trade (trade-openness = 0.5) is constant. Nonetheless, the ratio between home’s marginal utility of consumption to foreign’s marginal utility of consumption ist not unity. I consider the latter fact as the effect of incomplete markets. Is this correct?
Thank you very much