Quarterly Review 1732

The Macroeconomic Effects of World Trade in Financial Assets

Harold L. Cole

Summer 1993

This article analyzes some of the potential effects of increased international financial integration within a simple two-country model. In the model, the article considers a switch in the menu of internationally traded financial securities from bonds to complete contingent claims and examines the impact of this switch on the stochastic properties, including the cross-country correlations, of standard macroeconomic aggregates like output, consumption, and labor effort, as well as the trade balance.

Reprinted From: International Economic Review (Vol. 29, No. 2, May 1988, pp. 237-259)

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