Potential Welfare Losses from Financial Autarky and Trade Sanctions
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.
|Date of creation:||2004|
|Contact details of provider:|| Postal: Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy|
Web page: http://www.eui.eu/ECO/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2004/35. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Banks)
If references are entirely missing, you can add them using this form.