Gains from Trade and the Sovereign Bond Market

Abstract

Increasing international flows of goods, services, and financial assets have been shown to increase a country's welfare through various channels. This paper studies the interaction between a country's welfare gains from international trade and its sovereign’s access to bond markets. We do so by incorporating a sovereign bond market into a simple Armington (1969)' s trade model. While standard trade models suggest surprisingly small gains from trade, our model implies that introducing channels through a sovereign bond market greatly magnifies the gains from trade.

Keywords: Gains from trade, Sovereign debt, Sovereign default, Trade openness

JEL Classification: F14, F60, O19