NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financial Integration, Entrepreneurial Risk and Global Imbalances

George-Marios Angeletos, Vasia Panousi

NBER Working Paper No. 16761
Issued in February 2011
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w16761

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

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