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Financial integration, capital misallocation and global imbalances

  • Benhima, Kenza

This paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: 1) persistent current account surpluses and 2) high TFP growth in China. Under autarky, entrepreneurs in the emerging country overinvest in short-term projects and underinvest in long-term projects because short-term assets help them secure long-term investments in the presence of credit constraints. This creates an aggregate misallocation of capital. When financial markets integrate, entrepreneurs with long-term projects can have access to cheaper short-term assets abroad, which leaves them with more resources to invest in their projects. This both reduces capital misallocations and generates capital outflows.

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File URL: http://www.sciencedirect.com/science/article/pii/S0261560612000861
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 324-340

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:324-340
DOI: 10.1016/j.jimonfin.2012.04.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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