Financial Integration, Savings Gluts, and Asset Price Booms

Feng Felix Zhiyu (), Lu Will Jianyu () and Zhu Caroline H. ()
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Feng Felix Zhiyu: Michael G. Foster School of Business, University of Washington, Seattle, WA, USA
Lu Will Jianyu: Central Bank of Chile, Santiago, Chile
Zhu Caroline H.: School of Business, Government and Economics, Seattle Pacific University, Seattle, WA, USA

The B.E. Journal of Theoretical Economics, 2021, vol. 21, issue 1, 205-238

Abstract: Capital outflows after financial integration can lead to simultaneous increases in the national savings rate and asset prices of an economy with substantial financing costs. Under autarky, firms invest in risky capital while facing a borrowing constraint that creates a need for precautionary savings. Financial integration provides firms with access to foreign risk-free assets and results in two effects: a substitution effect, whereby firms divert some investments to foreign assets and cause capital outflows; and a wealth effect, whereby they grow richer in equilibrium and thus demand more domestic capital. Savings gluts and asset price booms occur when the wealth effect dominates.

Keywords: costly financing; dynamic portfolio choice; financial integration (search for similar items in EconPapers)
JEL-codes: E22 F36 G11 G15 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/bejte-2018-0050

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