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Question: What effect does incompleteness of international asset markets have on macroeconomic outcomes?

05 Oct 2022,11:36 PM

 

1. In the intertemporal approach to the current account, what are the shocks which matter? Why is it important whether they are temporary or permanent?

2. When and why will countries’ consumption growth rates be perfectly correlated? Is the hypothesis of perfect correlation supported empirically?

3. What effect does incompleteness of international asset markets have on macroeconomic outcomes?

4. “The current account balance is equal to the gap between national saving and investment, so a fiscal deficit – which is a reduction in government saving – will obviously worsen the current account deficit.” Discuss whether this is true, both theoretically and empirically.

5. In what sense does the ‘monetary’ model say that the exchange rate is determined by the ‘present value’ of current and future macroeconomic ‘fundamentals’? Discuss how this result assumes the absence of speculative bubbles.

Expert answer

 

The incomplete nature of international asset markets can lead to a number of macroeconomic outcomes, including higher levels of uncertainty, inefficient resource allocation, and fluctuations in exchange rates. In particular, when investors are unable to trade assets freely across borders, they may not be able to accurately assess the value of different assets, leading to increased volatility in financial markets. This can have a ripple effect throughout the economy, hindering economic growth and causing unemployment and inflation to rise.

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