Hello everyone, I recently started learning about two-country models, and I’m trying to implement a two-country economy, where residents of one country both deposit money to financial institutions and also buy foreign bonds. I have two questions:
(1) I want to include adjustment costs for buying foreign bonds, but since cross-country risk sharing is not possible, how should I determine the missing equation?
(2) If residents in both countries won’t buy domestic bonds, how should the bond market clear? Can this be solved through a government budget? (Adjustment costs paid to the government)
I might not have studied two-country models deeply enough, but these questions are really holding me back from progressing further, and I hope I can get some help here.