TY - JOUR AU - Mendoza,Enrique G. AU - Quadrini,Vincenzo AU - Rios-Rull,Jose-Victor TI - Financial Integration, Financial Deepness and Global Imbalances JF - National Bureau of Economic Research Working Paper Series VL - No. 12909 PY - 2007 Y2 - February 2007 UR - http://www.nber.org/papers/w12909 L1 - http://www.nber.org/papers/w12909.pdf N1 - Author contact info: Enrique G. Mendoza Department of Economics University of Maryland College Park, MD 20742 Tel: 301/405-3845 Fax: 301/405-7835 E-Mail: mendozae@econ.umd.edu Vincenzo Quadrini Department of Finance and Business Economics Marshall School of Business University of Southern California 701 Exposition Boulevard Los Angeles, CA 90089 Tel: 213/740-6521 Fax: 213/740-6650 E-Mail: quadrini@usc.edu Jose-Victor Rios-Rull University of Minnesota Department of Economics 4-101 Hanson Hall (off 4-179) 1925 Fourth Street South Minneapolis, MN 55455 Tel: (612) 625-0941 Fax: (612) 624-0209 E-Mail: vr0j@umn.edu AB - 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. ER -