Exploring Policy Options in Joint Intertemporal-Spatial Trade Models Using an Incomplete Markets Approach∗

In this paper we analyze some policy implications of incompleteness of markets in trade models, where there is both inter-spatial and intertemporal trade between countries. We interpret the absence of intertemporal trade as an absence of intermediation services provided by both domestic and foreign service providers. For simplicity, we consider extreme cases where intertemporal intermediation services can only be provided by domestic providers, so that when intertemporal trade in services is not allowed, markets are not complete. To our knowledge, this type of models is not used in the trade literature as general comparative statics results are unavailable. We use numerical simulation methods for insights. We first consider liberalization of financial services trade in a inter-spatial and intertemporal model of two countries, and we show how services liberalization can be welfare worsening in the presence of a tariff on goods trade spatially. We show that this can hold in a world with financial service trade autarky in which financial service trade liberalization involves both costless intertemporal intermediation provided by foreign service providers and in a more complex (and realistic) world where costly intermediation services can be provided by both within country and foreign providers. We then explore a model of inter-spatial and intertemporal trade for a single country in which there is a fixed exchange rate with a surrender requirement for foreign exchange generated by exports and money is non-neutral. The model incorporates intertemporal intermediation services which may or may not be liberalized across countries. We find that when services remain unliberalized there is an optimal trade intervention, even in the small open price taking economy case and there can be an optimal exchange rate.