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Transition to Equilibrium in International Trades

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    Abstract

    Building on Giraud & Tsomocos (2009), we develop a model of non equilibrium international trades with incomplete markets. Trades occur in continuous time, both on international and domestic markets. Traders are assumed to exhibit locally rational expectations on future prices, interest rates and exchange rates. Although currencies turn out to be non-neutral, if their stock grows sufficiently rapidly and if agents can trade assets during a sufficiently long period, the world economy converges in probability towards some interim constrained efficient state. Moreover, a random localized version of the Quantity Theory of Money holds provided the economy is not trapped in a liquidity hole. The traditional theory of comparative advantages, however, turns out to be challenged by international capital mobility.

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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2010/10012.pdf
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    Bibliographic Info

    Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 10012.

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    Length: 39 pages
    Date of creation: Jan 2010
    Date of revision:
    Handle: RePEc:mse:cesdoc:10012

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    Keywords: Currency; cash; liquidity; monetary policy; money; international trade; quantity theory of money; transition to equilibrium.;

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    1. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    2. J. Doyne Farmer & John Geanakoplos, 2009. "Hyperbolic Discounting Is Rational: Valuing the Far Future with Uncertain Discount Rates," Cowles Foundation Discussion Papers 1719, Cowles Foundation for Research in Economics, Yale University.
    3. Gaël Giraud, 2004. "The limit-price exchange process," Cahiers de la Maison des Sciences Economiques b04118, Université Panthéon-Sorbonne (Paris 1).
    4. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
    5. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 355-375, July.
    6. Sandas, Patrik, 2001. "Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 705-34.
    7. Duffie, Darrell & Shafer, Wayne, 1986. "Equilibrium in incomplete markets: II : Generic existence in stochastic economies," Journal of Mathematical Economics, Elsevier, vol. 15(3), pages 199-216, June.
    8. repec:fth:louvco:9853 is not listed on IDEAS
    9. Bottazzi, Jean-Marc, 1994. "Accessibility of Pareto optima by Walrasian exchange processes," Journal of Mathematical Economics, Elsevier, vol. 23(6), pages 585-603, November.
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