Patience, Persistence, and Welfare Costs of Incomplete Markets in Open Economies

Jinill Kim, Sunghyun Kim, and Andrew Levin
Authors registered in the RePEc Author Service: Andrew Theo Levin (), Sunghyun Henry Kim () and Jinill Kim

No 7, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: In this paper, we investigate the welfare implications of alternative financial market structures in a two-country endowment economy model. In particular, we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset, and we compare this welfare level with that obtained under complete asset markets. The welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent, but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent. For realistic cases in which agents are very patient and shocks are highly persistent (that is, the discount factor and the first-order autocorrelation are both near unity), the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters. Finally, using a non-linear solution algorithm, we confirm that a two-country production economy with endogenous labor supply has qualitatively similar welfare properties.

Keywords: international risk sharing; financial market structure (search for similar items in EconPapers)
JEL-codes: D52 F41 (search for similar items in EconPapers)
Date: 2001-04-01
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Patience, persistence, and welfare costs of incomplete markets in open economies (2003)
Working Paper: Patience, persistence and welfare costs of incomplete markets in open economies (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf1:7

Access Statistics for this paper

More papers in Computing in Economics and Finance 2001 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().