Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable
AbstractThis paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, “contagion,” and systemic risk.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15718.
Date of creation: Feb 2010
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Other versions of this item:
- Joseph E. Stiglitz, 2010. "Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable," American Economic Review, American Economic Association, vol. 100(2), pages 388-92, May.
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-20 (All new papers)
- NEP-BEC-2010-02-20 (Business Economics)
- NEP-CBA-2010-02-20 (Central Banking)
- NEP-LAM-2010-02-20 (Central & South America)
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