STOCK MARKETS, ADJUSTMENT COSTS AND THE INTERNATIONAL TRANSMISSION OFSHOCKS

This paper studies the role of stock markets and adjustment costs in t he international transmission of supply shocks. It uses an analyticall y tractable two-country one-good model where intertemporal optimizing behaviour of infinitely lived agents endogenously determines the rate of capital accumulation and the current account. It is shown that the presence of adjustment costs and stock markets provide new insights co ncerning the channels through which supply shocks are internationally transmitted.