This paper studies the role of stock markets and adjustment costs in the international transmission of supply shocks. It uses an analytically tractable two-country one-good model where inlertemporal optimizing behaviour of infinitely lived agcnts 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 concerning the channels through which supply shocks are internationally transmuted. Economists have long rccognized thati, in a world characterized by international capital mobility, disturbances that originate in one economy are readily transmitted to other economies. The channels through which such disturbances are transmitted internationally and the joint determination of external indebtedness, investment and saving continue to be the focus of recent research.
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