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http://ssrn.com/abstract=1960018
 
 

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Financial Integration, Entrepreneurial Risk and Global Dynamics


Vasia Panousi


Federal Reserve Board

George-Marios Angeletos


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

October 5, 2010

FEDS Working Paper No. 2010-54

Abstract:     
How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates 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 then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple 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 distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.

Number of Pages in PDF File: 46

Keywords: Financial integration, capital-account liberalization, incomplete markets, idiosyncratic risk, entrepreneurship, current-account deficits, global imbalances

JEL Classification: E13, F15, F41

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Date posted: November 15, 2011  

Suggested Citation

Panousi, Vasia and Angeletos, George-Marios, Financial Integration, Entrepreneurial Risk and Global Dynamics (October 5, 2010). FEDS Working Paper No. 2010-54. Available at SSRN: http://ssrn.com/abstract=1960018 or http://dx.doi.org/10.2139/ssrn.1960018

Contact Information

Vasia Panousi (Contact Author)
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
HOME PAGE: http://www.federalreserve.gov/research/staff/panousivasiax.htm
George-Marios Angeletos
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
Room E52-251b
Cambridge, MA 02142
United States
617-452-3859 (Phone)
617-253-1330 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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