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Financial Integration, Financial Development, and Global Imbalances

Author

Listed:
  • Enrique G. Mendoza
  • Vincenzo Quadrini
  • José-Víctor Ríos-Rull

Abstract

Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt. (c) 2009 by The University of Chicago. All rights reserved.

Suggested Citation

  • Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "Financial Integration, Financial Development, and Global Imbalances," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 371-416, June.
    • Handle: RePEc:ucp:jpolec:v:117:y:2009:i:3:p:371-416
    DOI: 10.1086/599706
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    References listed on IDEAS

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