A multicountry real business cycle model is developed capturing two important aspects of heterogeneity found in household survey data: only a small fraction of the population holds stock and a significant fraction of nonstockholders are borrowing constrained. The model is applied to data for twenty OECD countries. It generates cross-country consumption correlations consistent with those observed in the data. Potential welfare gains from international portfolio diversification by stockholders are large, leaving the observed 'home bias' as a significant puzzle. The model can also account for the finding in U.S. data that consumption of stockholders is more volatile than that of nonstockholders. Copyright 1996 by The editors of the Scandinavian Journal of Economics.
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