Making International Financial Integration Work for Low-Saving Countries

Eduardo Cavallo, Eduardo Fernandez-Arias and Matías Marzani

No 8508, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign assets that financial integration brings is an important risk offset that in many cases even eliminates the risk factor from the tradeoff altogether. Furthermore, it shows that the risk features of assets and liabilities depend on their type. Ultimately, whether international financial integration is in fact a reliable remedy for individual countries critically depends on the portfolio composition of their foreign assets and liabilities.

JEL-codes: E44 F32 F34 G01 G15 H63 (search for similar items in EconPapers)
Date: 2017-07
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:8508

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