TY - JOUR AU - Mendoza,Enrique G. AU - Quadrini,Vincenzo AU - Ríos-Rull,José-Victor TI - On the Welfare Implications of Financial Globalization without Financial Development JF - National Bureau of Economic Research Working Paper Series VL - No. 13412 PY - 2007 Y2 - September 2007 UR - http://www.nber.org/papers/w13412 L1 - http://www.nber.org/papers/w13412.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 M1 - published as Enrique G. Mendoza, Vincenzo Quadrini, José-Víctor Ríos-Rull. "On the Welfare Implications of Financial Globalization without Financial Development," in Richard Clarida and Francesco Giavazzi, organizers, "NBER International Seminar on Macroeconomics 2007" University of Chicago Press (2008) M3 - presented at "ISOM", June 15-16, 2007 AB - It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention. ER -