SSE/EFI Working Paper Series in Economics and Finance
No 320:
Financial Autarky and International Business Cycles
Jonathan Heathcote and Fabrizio Perri
Abstract: We present a two-country, two-good model in which there do
not exist any markets for international trade in financial assets. We
compare the predictions of this model to those of two other models, one in
which markets are complete and a second in which a single non-contingent
bond is traded. We find that only the financial autarky model can generate
volatility in the terms of trade similar to that in data for floating rate
period and, at the same time, account for observed cross-country output,
consumption, investment and employment correlations. We interpret our
findings as evidence that the extent of international borrowing and lending
opportunities is important for the international business cycle.
Keywords: International business cycles; incomplete markets.; (follow links to similar papers)
JEL-Codes: E32; F32; F33; F41; (follow links to similar papers)
29 pages, May 19, 1999, Revised April 30, 2000
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