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.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX