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Title:Incomplete markets and trade PDF Logo
Authors:Willen, Paul
Issue Date:2004
Series/Report no.:Working paper series // Federal Reserve Bank of Boston 04-8
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.
JEL:D52
F30
Document Type:Working Paper
Appears in Collections:Working Paper Series, Federal Reserve Bank of Boston

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