Potential Welfare Losses from Financial Autarky and Trade Sanctions

Alexis Anagnostopoulos

No ECO2004/35, Economics Working Papers from European University Institute

Abstract: This paper investigates frictions in the international financial and goods markets and assesses the welfare implications these frictions have. It is found that the reduction in goods trading, which results from the presence of trade costs, significantly reduces consumer welfare compared to the first best where trade is free and costless. By contrast, a complete prohibition of international financial asset trade has a small effect on welfare. This result has important implications for the policies on debt repayment and sovereign default. It implies that an exclusion from international financial markets might not be a sufficient threat to ensure sovereign debt repayment. Instead, a much more potent instrument of enforcement might be a threat of trade sanctions such as tariffs or even a trade embargo.

Keywords: welfare; financial autarky; trade sanctions; business cycles (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-fmk and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2004/35

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