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Potential Welfare Losses from Financial Autarky and Trade Sanctions

Author

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  • Alexis Anagnostopoulos

Abstract

This paper investigates frictions in the international financial and goods markets and assesses the welfare implications these frictions have. It is found that the reduction in goods trading, which results from the presence of trade costs, significantly reduces consumer welfare compared to the first best where trade is free and costless. By contrast, a complete prohibition of international financial asset trade has a small effect on welfare. This result has important implications for the policies on debt repayment and sovereign default. It implies that an exclusion from international financial markets might not be a sufficient threat to ensure sovereign debt repayment. Instead, a much more potent instrument of enforcement might be a threat of trade sanctions such as tariffs or even a trade embargo.

Suggested Citation

  • Alexis Anagnostopoulos, 2004. "Potential Welfare Losses from Financial Autarky and Trade Sanctions," Economics Working Papers ECO2004/35, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2004/35
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    Keywords

    welfare; financial autarky; trade sanctions; business cycles;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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