IDEAS home Printed from
   My bibliography  Save this paper

General Equilibrium with Trade Balance and Real Interest Rate Parity


  • Cremers, Emily


This paper demonstrates, in the context of a two-sector OLG neoclassicalgrowth model, conditions under which international trade in consumptiongoods alone may be sufficient for the equalization of real returns to physicalcapital across countries; that is, under which commodity arbitrage is sufficientfor real interest rate parity (RIRP). This role for repeated commodity arbitrageis established via a dynamic extension of the factor price equalization (FPE)theorem which is valid at all dates comprising the equilibrium path as well asits steady state. The results are at odds with the conventional view regardingRIRP which arises from open one-sector growth models, in which case steadystate trade balance and RIRP are irreconcilable, and are also a contradiction tofrequent assertions of long-run specialization in two-sector frameworks. An equilibriumpath for an integrated world economy yields an endogenous, time-variantcone of diversification which implies sufficient conditions for the dynamic pathsof a cross-section of economies to exhibit FPE, and hence RIRP with trade balance,at all points in time. These conditions require that the savings rates andinitial capital-labor ratios of individual countries do not deviate too significantlyfrom world averages, and that both sectors absorb capital easily. The first of theserequirements is sufficient to establish steady state FPE and RIRP in the generalspecification. The first two requirements are sufficient for the entire equilibriumpath to be characterized by FPE and RIRP in a log-linear example.

Suggested Citation

  • Cremers, Emily, 2001. "General Equilibrium with Trade Balance and Real Interest Rate Parity," Staff General Research Papers Archive 34859, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:34859

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Emily T. Cremers & Partha Sen, 2005. "Transfers and the Terms of Trade in an Overlapping Generations Model," Working papers 138, Centre for Development Economics, Delhi School of Economics.
    2. Partha Sen, 2005. "Debt Policy in a Competitive Two-Sector Overlapping Generations Model," Working papers 137, Centre for Development Economics, Delhi School of Economics.
    3. Cremers, Emily T., 2005. "Intergenerational Welfare And Trade," Macroeconomic Dynamics, Cambridge University Press, vol. 9(05), pages 585-611, November.
    4. Partha Sen, 2005. "Perfect Competition and the Keynesian Cross:Revisiting Tobin," Working papers 135, Centre for Development Economics, Delhi School of Economics.

    More about this item


    overlapping generations model; real interest rate parity; factor price equalization; integrated world economy;

    JEL classification:

    • F - International Economics
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O - Economic Development, Innovation, Technological Change, and Growth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genres:34859. 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: (Curtis Balmer). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.