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Financial Integration, Entrepreneurial Risk and Global Imbalances

  • George-Marios Angeletos
  • Vasia Panousi

How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? We investigate this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk-- a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is to show that this friction provides a simple explanation for the emergence of global imbalances, a resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16761.

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Date of creation: Feb 2011
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Publication status: published as “ Financial Integration, Entrepreneurial Risk and Global Dynamics ” Journal of Economic Theory , vol. 146, no. 3 (May 2011) , with V. Panousi.
Handle: RePEc:nbr:nberwo:16761
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