This article analyzes some of the potential effects of increased international financial integration within a simple two-country model. In the model, the article considers a switch in the menu of internationally traded financial securities from bonds to complete contingent claims and examines the impact of this switch on the stochastic properties, including the cross-country correlations, of standard macroeconomic aggregates like output, consumption, and labor effort, as well as the trade balance.
This is a revised version of a paper published in the _International Economic Review_ (May 1988, vol. 29, no. 2, pp. 237-59): "Financial Structure and International Trade" by Harold Cole. The article appears here with the permission of the University of Pennsylvania. © All rights reserved. https://doi.org/10.2307/2526664