Abstract
The authors present a stochastic model of two barter economies, with production, linked by free trade in goods and securities, which generates Pareto-efficient international transmissions of business cycle disturbances. Each country is inhabi ted by an infinitely-lived, representative firm and consumer/worker, and is subject to country-specific production shocks. The internation al capital market effects perfect pooling of country-specific risk. C onsumption and output volatility may be higher in trade than under au tarchy, as agents can be induced to undertake additional risk in exchange for a higher expected utility. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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