This paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, “contagion,” and systemic risk.
Published: Joseph E. Stiglitz, 2010.
"Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable,"
American Economic Review,
American Economic Association, vol. 100(2), pages 388-92, May.
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