Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable

12 Pages Posted: 8 Feb 2010 Last revised: 5 Sep 2010

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: February 2010

Abstract

This paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, "contagion," and systemic risk.

Suggested Citation

Stiglitz, Joseph E., Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable (February 2010). NBER Working Paper No. w15718. Available at SSRN: https://ssrn.com/abstract=1548776

Joseph E. Stiglitz (Contact Author)

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