Incomplete Financial Market, Structure of Foreign Asset, International Trade
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| Title | Incomplete Financial Market, Structure of Foreign Asset, International Trade
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| Author | Li Junqing and Han Qiheng |
| Organization | School of Economics, Nankai University; School of Finance, SHUFE |
| Email | leejqdoc@163.com; hqheng@mail.shufe.edu.cn |
| Key Words | Incomplete Financial Market; Structure of Foreign Asset; International Trade |
| Abstract | Based on the dynamical uncertainty model, the paper analyzes how financial liberalization and deepening in one country can influence individual consumption, asset selection and welfare. The results show that the most important factor that increases global trade imbalances and shape current structure of capital flows is the difference of financial development levels between two countries. Under economic environment of financial liberalization, the gap of financial development between two countries will cause less financial development country appear trade surplus, just because the individual in the country prefers to more precautionary savings. At same time, the country with developed financial market owns trade deficit. Besides, the difference in completeness of financial market also impacts the asset portfolio selection of individual, it prompts that the country with developed financial market takes long equity & short debt foreign asset portfolio strategy, the country with less financial development takes short equity & long debt strategy。It cause international capital flows from country with less financial development, mainly through purchasing bond, to country with developed financial market. Finally, the paper concludes that financial development plays a dominant role in determining world interest rate and individual welfare in different counties. |
| Serial Number | WP25 |
| Time | 2010-12-09 |
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