Goods and Asset Market Interdependence in a Risky World

Abstract

This paper explores the link between international asset markets and international trade in goods to determine whether trade along these dimensions tends to be complementary or plays the role of substitutes. International financial markets permit agents in different countries to pool away the idiosyncratic portion of risk, while in the absence of international financial markets, countries will pursue other means to insure against unanticipated disturbances. The author shows that the endogeny of resource allocations to market completeness leads to a relationship of complementarity between trade in goods and trade in assets. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.