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Financial integration, entrepreneurial risk and global dynamics

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  • Vasia Panousi
  • George-Marios Angeletos

Abstract

How 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 Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-54.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-54

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Keywords: Capital movements ; Capital market ; Balance of payments;

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Cited by:
  1. Karine Gente & Miguel León-Ledesma & Carine Nourry, 2013. "External Constraints and Endogenous Growth: Why Didn't Some Countries Benefit from Capital Flows?," Working Papers halshs-00822385, HAL.
  2. Christiane Clemens & Maik Heinemann, 2010. "The Effects of International Financial Integration in a Model with Heterogeneous Firms and Credit Frictions," DEGIT Conference Papers c015_046, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Benigno, Gianluca & Fornaro, Luca, 2012. "Reserve Accumulation, Growth and Financial Crises," CEPR Discussion Papers 9224, C.E.P.R. Discussion Papers.
  4. Damiano Sandri, 2010. "Growth and Capital Flows with Risky Entrepreneurship," IMF Working Papers 10/37, International Monetary Fund.
  5. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-47, Board of Governors of the Federal Reserve System (U.S.).
  6. Julien Bengui & Enrique G. Mendoza & Vincenzo Quadrini, 2012. "Capital Mobility and International Sharing of Cyclical Risk," NBER Working Papers 18372, National Bureau of Economic Research, Inc.
  7. Benhima, Kenza, 2013. "A reappraisal of the allocation puzzle through the portfolio approach," Journal of International Economics, Elsevier, vol. 89(2), pages 331-346.
  8. Sara Eugeni, 2013. "An OLG model of global imbalances," Discussion Papers 13/05, Department of Economics, University of York.
  9. von Hagen, Jürgen & Zhang, Haiping, 2014. "Financial development, international capital flows, and aggregate output," Journal of Development Economics, Elsevier, vol. 106(C), pages 66-77.
  10. Jürgen von Hagen & Haiping Zhang, 2014. "International Capital Flows in the Model with Limited Commitment and Incomplete Markets," Open Economies Review, Springer, vol. 25(1), pages 195-224, February.
  11. Pierre-Olivier Gourinchas & Hélène Rey, 2013. "External Adjustment, Global Imbalances and Valuation Effects," NBER Working Papers 19240, National Bureau of Economic Research, Inc.
  12. Corbae, Dean & Marimon, Ramon, 2011. "Introduction to Incompleteness and Uncertainty in Economics," Journal of Economic Theory, Elsevier, vol. 146(3), pages 775-784, May.
  13. Karl Farmer & Irina Ban, 2014. "Modeling financial integration, intra-EMU and Asian-US external imbalances," Graz Economics Papers 2014-06, University of Graz, Department of Economics.
  14. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-31, Board of Governors of the Federal Reserve System (U.S.).
  15. Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth centre Working Paper Series 1306, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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