NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Integration, Financial Deepness and Global Imbalances

Enrique G. Mendoza, Vincenzo Quadrini, Jose-Victor Rios-Rull

NBER Working Paper No. 12909
Issued in February 2007
NBER Program(s):   EFG   IFM

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.

download in pdf format
   (557 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12909

Published: 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.

Users who downloaded this paper also downloaded* these:
Prasad, Rajan, and Subramanian w13619 Foreign Capital and Economic Growth
Eichengreen w10497 Global Imbalances and the Lessons of Bretton Woods
Edison, Levine, Ricci, and Slok w9164 International Financial Integration and Economic Growth
Caballero and Krishnamurthy w14688 Global Imbalances and Financial Fragility
Edwards w12904 On Current Account Surpluses and the Correction of Global Imbalances
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us