Patience, persistence and welfare costs of incomplete markets in open economies

Jinill Kim, Sunghyun Kim () and Andrew Levin ()

No 696, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, we investigate the welfare implications of alternative financial market structures in a two-country endowment economy model. In particular, we obtain an analytic expression for the expected lifetime utility of the representative household when sovereign bonds are the only internationally traded asset, and we compare this welfare level with that obtained under complete asset markets. The welfare cost of incomplete markets is negligible if agents are very patient and shocks are not very persistent, but this cost is dramatically larger if agents are relatively impatient and shocks are highly persistent. For realistic cases in which agents are very patient and shocks are highly persistent (that is, the discount factor and the first-order autocorrelation are both near unity), the welfare cost of incomplete markets is highly sensitive to the specific values of these parameters. Finally, using a non-linear solution algorithm, we confirm that a two-country production economy with endogenous labor supply has qualitatively similar welfare properties.

Keywords: Financial markets; Welfare (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-dge and nep-fmk
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Patience, persistence, and welfare costs of incomplete markets in open economies (2003)
Working Paper: Patience, Persistence, and Welfare Costs of Incomplete Markets in Open Economies (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:696

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