Financial Liberalization and Contagion with Unobservable Savings

42 Pages Posted: 16 Jan 2013 Last revised: 28 Oct 2016

See all articles by Ettore Panetti

Ettore Panetti

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students; UECE - Research Unit on Complexity in Economics; SUERF - The European money and finance forum; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Date Written: April 15, 2012

Abstract

How does the presence of decentralized market-based liquidity channels affect financial liberalization and contagion? In order to answer this question, I extend the Diamond and Dybvig (1983) model of financial intermediation to a two-country environment, in which banks in each country enjoy a comparative advantage in one investment technology, and individuals can borrow and lend in an unobservable market. In this environment, I prove that the possibility of hidden savings has three main effects. First, it improves welfare with respect to the autarkic equilibrium by allowing gains from 'hidden' financial integration. Second, it halts the process of 'official' financial integration. Third, it lowers the resilience of the economy to unexpected liquidity shocks.

Keywords: financial intermediation, liberalization, financial contagion, unobservable savings

JEL Classification: E44, G21, G28

Suggested Citation

Panetti, Ettore, Financial Liberalization and Contagion with Unobservable Savings (April 15, 2012). International Review of Financial Analysis, Vol. 36, 2014, Available at SSRN: https://ssrn.com/abstract=2200801 or http://dx.doi.org/10.2139/ssrn.2200801

Ettore Panetti (Contact Author)

University of Naples Federico II, CSEF - Center for Studies in Economics and Finance, Students ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, 80126
Italy

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

SUERF - The European money and finance forum ( email )

PO Box 98
Amsterdam, 1000AB
Netherlands

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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