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Macroeconomic Interdependence under Incomplete Markets

  • Fabio Ghironi

    ()

    (Boston College)

I develop a tractable, two-country, real model of macroeconomic interdependence with a role for net foreign asset dynamics. Absence of Ricardian equivalence in an overlapping generations structure ensures existence of a well-defined, endogenously determined, steady-state, international distribution of asset holdings, to which the world economy returns following temporary shocks. The model offers a plausible explanation for the failure of statistical tests to reject the hypothesis of a unit root in series of net foreign assets. Model dynamics after productivity shocks are significantly different from those of a setup in which net foreign assets do not move after shocks, such as Corsetti and Pesenti's (2001a) model. The difference relative to a complete markets economy in which net foreign asset movements play no role in shock transmission is smaller. It is amplified if the substitutability across goods rises, if shocks are permanent, and if steady-state net foreign assets are not zero.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 471.

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Length: 65 pages
Date of creation: 16 Aug 2000
Date of revision: 07 Feb 2003
Handle: RePEc:boc:bocoec:471
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