Financial integration, entrepreneurial risk and global dynamics
AbstractHow does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk---a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-54.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Angeletos, George-Marios & Panousi, Vasia, 2011. "Financial integration, entrepreneurial risk and global dynamics," Journal of Economic Theory, Elsevier, vol. 146(3), pages 863-896, May.
- NEP-ALL-2010-11-27 (All new papers)
- NEP-BEC-2010-11-27 (Business Economics)
- NEP-CBA-2010-11-27 (Central Banking)
- NEP-ENT-2010-11-27 (Entrepreneurship)
- NEP-OPM-2010-11-27 (Open Economy Macroeconomic)
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