43 Pages Posted: 26 Jan 2011
Date Written: December 11, 2010
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: 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