Making International Financial Integration Work for Low-Saving Countries

45 Pages Posted: 17 Jan 2018

See all articles by Eduardo A. Cavallo

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB)

Matias Marzani

Washington University in St. Louis

Date Written: July 2017

Abstract

Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign assets that financial integration brings is an important risk offset that in many cases even eliminates the risk factor from the tradeoff altogether. Furthermore, it shows that the risk features of assets and liabilities depend on their type. Ultimately, whether international financial integration is in fact a reliable remedy for individual countries critically depends on the portfolio composition of their foreign assets and liabilities.

Keywords: : Financial integration, Saving, External crisis, Foreign assets, Foreign liabilities

JEL Classification: E44, F32, F34, G01, G15, H63

Suggested Citation

Cavallo, Eduardo A. and Fernandez-Arias, Eduardo and Marzani, Matias, Making International Financial Integration Work for Low-Saving Countries (July 2017). IDB Working Paper No. IDB-WP-823, Available at SSRN: https://ssrn.com/abstract=3103798 or http://dx.doi.org/10.2139/ssrn.3103798

Eduardo A. Cavallo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States
202-623-3783 (Phone)
202-623-2481 (Fax)

Matias Marzani

Washington University in St. Louis

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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