Endogenous Financial Intermediation and Real Effects of Capital Account Liberalization

Posted: 8 Sep 2005

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

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Abstract

We consider lending and investment under asymmetric information in a small, developing economy. We allow different forms of financial contracts to arise endogenously. Financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring. We then examine the impact of opening the capital account on both welfare and the structure of lending contracts. Liberalizing the capital account may improve or worsen the efficiency of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. We show that efficient financial intermediaries in the closed economy are neither necessary nor sufficient for a capital account liberalization to improve welfare.

Keywords: Financial intermediation, capital account, moral hazard, lending contracts

JEL Classification: G2, F3, O1

Suggested Citation

Alessandria, George A. and Qian, Jun, Endogenous Financial Intermediation and Real Effects of Capital Account Liberalization. Journal of International Economics, Vol. 67, No. 1, pp. 97-128, September 2005. Available at SSRN: https://ssrn.com/abstract=797845

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Jun Qian

Fanhai International School of Finance, Fudan University ( email )

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

University of Pennsylvania - Wharton Financial Institutions Center

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