Financial Integration, Entrepreneurial Risk and Global Imbalances

43 Pages Posted: 26 Jan 2011

See all articles by Vasia Panousi

Vasia Panousi

University of Montreal, Department of Economics

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: December 11, 2010

Abstract

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.

Suggested Citation

Panousi, Vasia and Angeletos, George-Marios, Financial Integration, Entrepreneurial Risk and Global Imbalances (December 11, 2010). Available at SSRN: https://ssrn.com/abstract=1747850 or http://dx.doi.org/10.2139/ssrn.1747850

Vasia Panousi (Contact Author)

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George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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