Financial Integration, Savings Gluts, and Asset Price Booms

The B.E. Journal of Theoretical Economics, Forthcoming

37 Pages Posted: 22 Aug 2013 Last revised: 12 Aug 2020

See all articles by Felix Zhiyu Feng

Felix Zhiyu Feng

University of Washington - Michael G. Foster School of Business

Will Jianyu Lu

Central Bank of Chile

Caroline Zhu

University of Oklahoma

Date Written: August 10, 2020

Abstract

Capital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices in an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

Keywords: dynamic portfolio choice, financial integration, costly financing

JEL Classification: G11, G15, F36, E22

Suggested Citation

Feng, Felix and Lu, Jianyu and Zhu, Caroline, Financial Integration, Savings Gluts, and Asset Price Booms (August 10, 2020). The B.E. Journal of Theoretical Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2310893 or http://dx.doi.org/10.2139/ssrn.2310893

Felix Feng (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Jianyu Lu

Central Bank of Chile ( email )

Agustinas 1180
Santiago, RM 8340454
Chile
+56 22 388 2961 (Phone)

HOME PAGE: http://www.jianyulu.com

Caroline Zhu

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

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