Unbalanced financial globalization

Damien Capelle and Bruno Pellegrino

No 358, Working Papers from The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State

Abstract: We use a dynamic spatial general equilibrium model of international investment and production to in vestigate the real implications of the last five decades of financial globalization. We introduce a wedge accounting framework to estimate country- and time-varying measures of outward and inward Revealed Capital Account Openness (RKO). We show how to identify these wedges for a large panel of countries using limited publicly available data on national accounts and external asset and liability po- sitions since the 1970s. Our analysis reveals striking cross-country differences in the pace and direction of financial account opening: wealthier countries have become relatively more open to foreign capital inflows, while poorer countries have become relatively more open to capital outflows, a phenomenon we call "Unbalanced Financial Globalization." Counterfactual simulations show that this unbalanced financial globalization has worsened capital allocation, resulting in a 5.9% decrease in world GDP, a 3.4% rise in cross-country income inequality, lower wages in poorer countries, and a decline in rates of return on capital in richer countries. In contrast, if financial account opening had been uniform, the improved allocation of capital would have reduced income inequality, and increased global GDP. These findings underscore the crucial role of spatial heterogeneity in shaping the real impact of international capital markets integration.

Keywords: capital flows; capital allocation; globalization; international finance; open economy (search for similar items in EconPapers)
JEL-codes: F2 F3 F4 F6 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-dge and nep-fdg
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Working Paper: Unbalanced Financial Globalization (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cbscwp:324648

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