Financial integration, capital misallocation and global imbalances

Kenza Benhima

Journal of International Money and Finance, 2013, vol. 32, issue C, 324-340

Abstract: This paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: 1) persistent current account surpluses and 2) high TFP growth in China. Under autarky, entrepreneurs in the emerging country overinvest in short-term projects and underinvest in long-term projects because short-term assets help them secure long-term investments in the presence of credit constraints. This creates an aggregate misallocation of capital. When financial markets integrate, entrepreneurs with long-term projects can have access to cheaper short-term assets abroad, which leaves them with more resources to invest in their projects. This both reduces capital misallocations and generates capital outflows.

Keywords: Growth; Capital flows; Credit constraints; Financial globalization; Technological change. (search for similar items in EconPapers)
JEL-codes: F36 F43 O16 O33 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:32:y:2013:i:c:p:324-340

DOI: 10.1016/j.jimonfin.2012.04.009

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