The Development of Financial Intermediation and Real Effects of Capital Account Liberalization

48 Pages Posted: 13 Oct 2001

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Jun Qian

Fanhai International School of Finance, Fudan University; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: July 2001

Abstract

We consider lending and investment under asymmetric information in an emerging economy. We allow for different forms of financial contracts to arise endogenously in the credit market. We examine the impact of opening the capital account on both aggregate output level and the structure of lending arrangements. Financial intermediaries mitigate the moral hazard problem in investment choice through costly monitoring all projects and liquidating risky, negative NPV projects. Depending on the quality and cost of the monitoring technology, opening the capital account may strengthen or weaken the role of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. Our results suggest situations where limiting the capital inflow or outflow may be necessary to avoid an aggregate risk shift and the collapse of the financial intermediation sector.

JEL Classification: G2, F3, O

Suggested Citation

Alessandria, George A. and Qian, Jun, The Development of Financial Intermediation and Real Effects of Capital Account Liberalization (July 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=287096 or http://dx.doi.org/10.2139/ssrn.287096

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

Jun Qian

Fanhai International School of Finance, Fudan University ( email )

Shanghai
China
86-21-63895501 (Phone)
86-21-62934572 (Fax)

HOME PAGE: http://www.fisf.fudan.edu.cn/show-65-69.html

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
Philadelphia, PA 19104
United States

HOME PAGE: http://fic.wharton.upenn.edu/fic/

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