NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Volatility and the Welfare Costs of Financial Market Integration

Pierre-Richard Agenor, Joshua Aizenman

NBER Working Paper No. 6782
Issued in November 1998
NBER Program(s):   ITI

This paper examines the effect of volatility on the costs and benefits of financial market integration. The basic framework combines the costly state verification model and the contract enforceability approach. The welfare effects of financial market integration are assessed by comparing welfare under financial autarky and financial openness -- under which foreign banks, characterized by lower costs of intermediation and a lower markup rate, have free access to domestic capital markets. The analysis shows that financial integration may be welfare reducing if world interest rates under openness are highly volatile. The basic framework is then extended to consider the case of an upward-sloping domestic supply curve of funds and congestion externalities. It is shown, in particular, that opening the economy to unrestricted inflows of capital may magnify the welfare cost of existing distortions, such as congestion externalities or deposit insurance.

download in pdf format
   (1217 K)

email paper

This paper is available as PDF (1217 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: The Asian Financial Crisis, Agenor, P.R., M. Miller and A. Weber, eds., Cambridge: Cambridge University Press, 1999, pp. 195-225.

Users who downloaded this paper also downloaded these:
Prasad, Rogoff, Wei, and Kose Financial Globalization, Growth and Volatility in Developing Countries
Mendoza, Quadrini, and RĂ­os-Rull w12909 Financial Integration, Financial Deepness and Global Imbalances
Demirguc-Kunt, Laeven, and Levine w9890 Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation
Chinn and Dooley w5280 Asia-Pacific Capital Markets: Measurement of Integration and the Implications for Economic Activity
Stiglitz w15718 Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us