46 Pages Posted: 15 Nov 2011
Date Written: October 5, 2010
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.
Keywords: Financial integration, capital-account liberalization, incomplete markets, idiosyncratic risk, entrepreneurship, current-account deficits, global imbalances
JEL Classification: E13, F15, F41
Suggested Citation: 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: https://ssrn.com/abstract=1960018 or http://dx.doi.org/10.2139/ssrn.1960018