Growth and risk-sharing with incomplete international assets markets

This paper develops a general equilibrium model of limited international asset trade in a two-country setting. In the model, only non-contingent claims can be traded in international assets markets. The paper has three main results. First, it establishes a simple and intuitive condition for the existence of a non-degenerate stationary distribution of world wealth; this condition requires the country with the highest expected growth rate under autarky to have the lowest autarky risk-free interest rate. Second, the paper compares welfare across regimes. It is shown that when a stationary wealth distribution exists, a small country may actually do better in a regime of incomplete asset trade than under complete markets. Third, the paper shows that in an environment of incomplete markets, capital controls may increase world growth. (C) 1997 Elsevier Science B.V.