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On the Welfare Implications of Financial Globalization without Financial Development

In: NBER International Seminar on Macroeconomics 2007

Author

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

Abstract

It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "On the Welfare Implications of Financial Globalization without Financial Development," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 283-312, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:3012
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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