Financial Integration, Entrepreneurial Risk and Global Imbalances

George-Marios Angeletos and Vasia Panousi ()

No 16761, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? We investigate this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk-- a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is to show that this friction provides a simple explanation for the emergence of global imbalances, a resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.

JEL-codes: E13 F15 F41 (search for similar items in EconPapers)
Date: 2011-02
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (104)

Published as “ Financial Integration, Entrepreneurial Risk and Global Dynamics ” Journal of Economic Theory , vol. 146, no. 3 (May 2011) , with V. Panousi.

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