Evaluating international financial integration under leverage constraints
The global financial crisis has undermined many economists' views about the benefits of open financial markets. Anecdotal evidence seems to indicate that financial linkages may propagate shocks during crises. This paper develops a simple two-country model in which financial liberalisation across countries takes place in the presence of credit market distortions within countries. Countries may be subject to macro risk coming from productivity shocks and direct shocks to the credit system ('financial shocks'). Three different degrees of financial linkages between countries are examined. It is shown that the type of financial integration is critical for both macroeconomic outcomes and welfare. In particular, financial integration in bond markets alone may increase aggregate consumption volatility and reduce welfare. Financial integration in both bond and equity markets generates high positive co-movement across countries, but is welfare-improving.
Year of publication: |
2011
|
---|---|
Authors: | Devereux, Michael B. ; Sutherland, Alan |
Published in: |
European Economic Review. - Elsevier, ISSN 0014-2921. - Vol. 55.2011, 3, p. 427-442
|
Publisher: |
Elsevier |
Keywords: | International financial integration Leverage constraints Welfare |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Sutherland, Alan, (2007)
-
Solving for Country Portfolios in Open Economy Macro Models
Devereux, Michael B., (2007)
-
Financial Globalization and Monetary Policy
Devereux, Michael B., (2007)
- More ...