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Financial Integration, Entrepreneurial Risk and Global Imbalances

43 Pages Posted: 26 Jan 2011  

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)

University of Montreal, Department of Economics ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://https://sites.google.com/site/panousi/

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)

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Cambridge, MA 02138
United States

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