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Financial Integration, Savings Gluts, and Asset Price Booms

Author

Listed:
  • Feng Felix Zhiyu

    (Michael G. Foster School of Business, University of Washington, Seattle, WA, USA)

  • Lu Will Jianyu

    (Central Bank of Chile, Santiago, Chile)

  • Zhu Caroline H.

    (School of Business, Government and Economics, Seattle Pacific University, Seattle, WA, USA)

Abstract

Capital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

Suggested Citation

  • Feng Felix Zhiyu & Lu Will Jianyu & Zhu Caroline H., 2021. "Financial Integration, Savings Gluts, and Asset Price Booms," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 21(1), pages 205-238, January.
    • Handle: RePEc:bpj:bejtec:v:21:y:2021:i:1:p:205-238:n:3
    DOI: 10.1515/bejte-2018-0050
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    More about this item

    Keywords

    costly financing; dynamic portfolio choice; financial integration;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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