Financial Integration, Financial Deepness and Global Imbalances

Enrique Mendoza, Vincenzo Quadrini and José-Víctor Ríos-Rull

No 12909, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Large and persistent global financial imbalances need not be the harbinger of a world financial crash. Instead, we show that these imbalances can be the outcome of financial integration when countries differ in financial markets deepness. In particular, countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial deepness also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of non-diversifiable equity and FDI. Abstracting from the potential impact of globalization on financial development, liberalization leads to sizable welfare gains for the more financially-developed countries and losses for the others. Three empirical observations motivate our analysis: (1)financial deepness varies widely even amongst industrial countries, with the United States ranking at the top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international capital markets liberalization; (3) net exports and current account balances are negatively correlated with indicators of financial development.

JEL-codes: E21 F3 F32 F41 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-cba, nep-dge and nep-fdg
Note: EFG IFM
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Citations: View citations in EconPapers (132)

Published as Mendoza, Enrique G., Jose-Victor Rios-Rull and Vincenzo Quadrini. "Financial Integration, Financial Deepness and Global Imbalances." Journal of Political Economy 117, 3 (2009): 371-410.

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Working Paper: Financial Integration, Financial Deepness and Global Imbalances (2007)
Working Paper: Financial Integration, Financial Deepness and Global Imbalance (2007)
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