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.
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Length: 29 pages Date of creation: 19 May 1999 Date of revision:
30 Apr 2000 Handle: RePEc:hhs:hastef:0320
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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