Contagion, Liberalization, and the Optimal Structure of Globalization

Joseph Stiglitz

Journal of Globalization and Development, 2010, vol. 1, issue 2, 47

Abstract: Advocates of capital market liberalization argue that it leads to greater stability: countries faced with a negative shock borrow from the rest of the world, allowing cross-country smoothing. There is considerable evidence against this conclusion. This paper explores one reason: integration can exacerbate contagion; a failure in one country can more easily spread to others. It derives conditions under which such adverse effects overwhelm the putative positive effects. It explains how capital controls can be welfare enhancing, reducing the risk of adverse effects from contagion. This paper presents an analytic framework within which we can begin to address broader questions of optimal economic architectures.

Keywords: contagion; liberalization; globalization; capital markets; financial crisis (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (26)

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DOI: 10.2202/1948-1837.1149

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Journal of Globalization and Development is currently edited by Joseph E. Stiglitz, Kevin Gallagher, Jeronim Capaldo, Arjun Jayadev, José Antonio Ocampo and Dani Rodrik

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