Dynamic applied general equilibrium trade policy analysis in the presence of foreign asset cross-ownership

This paper addresses the question to which extent the prevailing modelling practice of ignoring foreign asset cross-ownership patterns in applied general equilibrium trade policy studies may give rise to distorted predictions. The analytic framework is a stylized dynamic two-country model with international capital mobility and intertemporally optimizing agents. In principle even the sign of the predicted welfare effect of a trade policy shock might reverse, when the actual cross-ownership structure underlying a given net foreign asset position is taken into account. However, the analysis also indicates conditions under which the error incurred by disregarding asset crossholdings remains negligible. (C) 1999 Elsevier Science B.V. All rights reserved.