The goal of this research is to understand the economic factors producing different policy outcomes in open economies, and to evaluate in a quantitative fashion the implications for global welfare of the increasing integration of world financial markets. To further the first component of this plan, the project studies game-theoretic models of discretionary policymaking, assuming that the private sector has rational expectations. Central issues include the possibility of default on public debt and the role of currency devaluation in financial crises. The second component of the work calculates measures of the gains to countries from the ability to pool country-specific risks internationally, and to borrow and lend. Linkages between international capital mobility and long-run economic growth rates will also be studied. This project has the potential to explain certain empirical features of international capital markets. In addition, the findings are relevant for judging the likely benefits of measure to integrate capital markets further - such as the current initiatives within the European Community - or the costs of measures to restrict capital movements, which sometimes are proposed on macroeconomic grounds.
