Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable

Joseph E. Stiglitz

NBER Working Paper No. 15718
Issued in February 2010
NBER Program(s):The International Finance and Macroeconomics Program

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.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15718

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. citation courtesy of

Users who downloaded this paper also downloaded* these: