The paper analyzes the consequences of joining markets of government discount bonds between identical economies when, in each country, there exists a positive probability of the government to default. In autarky such economies of overlapping generations of consumers with capital accumulation...

We develop an overlapping generations model with asset and capital accumulation to analyze the interaction between the real economy and international asset markets. The world consists of two homogenous countries with an integrated asset market, which differ only in levels of their capital stock....