Financial Autarky and International Business Cycles

Jonathan Heathcote and Fabrizio Perri

No 320, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

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. (search for similar items in EconPapers)
JEL-codes: E32 F32 F33 F41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 1999-05-19, Revised 2000-04-30
New Economics Papers: this item is included in nep-dge and nep-ind
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Citations: View citations in EconPapers (26)

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Journal Article: Financial autarky and international business cycles (2002)
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