Financial Frictions, International Capital Flows and Welfare

37 Pages Posted: 12 Jul 2018

See all articles by Filippo Taddei

Filippo Taddei

School of Advanced International Studies (SAIS) - The Johns Hopkins University

Date Written: July 11, 2018

Abstract

The connection between the financial crisis and global imbalances is controversial. This paper argues that this relationship is likely to be connected to the existence of heterogenous financial frictions in different domestic credit markets. By developing a general equilibrium model where adverse selection and limited pledgeability coexist, this work highlights why adverse selection may play a pivotal role in determining the different (often opposing) welfare effects of international capital flows on originating and destination countries. This perspective also advances an analytical framework that is flexible enough to analyze the global effects on investment allocation of the "Saving Glut", of the policies facilitating financial integration and macro-prudential policy.

Keywords: limited pledgeability, asymmetric information, international capital flows, welfare, macro-prudential policy

JEL Classification: D53, E2, F3

Suggested Citation

Taddei, Filippo, Financial Frictions, International Capital Flows and Welfare (July 11, 2018). ECB Working Paper No. 2167, Available at SSRN: https://ssrn.com/abstract=3212700 or http://dx.doi.org/10.2139/ssrn.3212700

Filippo Taddei (Contact Author)

School of Advanced International Studies (SAIS) - The Johns Hopkins University ( email )

via Andreatta, 3
Bologna, Bologna
Italy

HOME PAGE: http://https://www.sais-jhu.edu/filippo-taddei

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