Incomplete markets and trade

Paul Willen

No 04-8, Working Papers from Federal Reserve Bank of Boston

Abstract: In this paper, we show that incomplete markets lead to trade imbalances. We use a two-period general equilibrium model with countries composed of heterogeneous households. We look at a world where, when markets are complete, countries engage in balanced trade and we show that when some of those markets are absent, trade imbalances emerge. Market incompleteness across countries causes trade imbalances because national income in some countries is more sensitive to risky asset payoffs than in others. Market incompleteness within countries causes trade imbalances because superior risk-sharing in one country leads to a lower precautionary demand for saving.

Keywords: International; trade (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (5)

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