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Rethinking the effects of financial globalization

During the last few decades, many emerging markets lifted restrictions on cross-border financial transactions. In this paper, we present a simple model that can account for the observed effects of financial globalization. The model emphasizes the role of imperfect enforcement of domestic debts and the interactions between domestic and foreign debts. Financial globalization can lead to a variety of outcomes: (i) domestic capital flight and ambiguous effects on net capital flows, investment, and growth; (ii) capital inflows and higher investment and growth; or (iii) volatile capital flows and unstable domestic financial markets. The model shows how the effects of financial globalization depend on the level of development, productivity, domestic savings, and the quality of institutions.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1128.

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Date of creation: Oct 2010
Date of revision: Oct 2015
Handle: RePEc:upf:upfgen:1128
Contact details of provider: Web page: http://www.econ.upf.edu/

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