Financial integration, entrepreneurial risk and global dynamics

George-Marios Angeletos and Vasia Panousi ()

No 2010-54, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk---a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.

Keywords: Capital movements; Capital market; Balance of payments (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-ent and nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financial integration, entrepreneurial risk and global dynamics (2011)
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