On the welfare implications of financial globalization without financial development
By: Enrique G. Mendoza, Vincenzo Quadrini, José-Victor Ríos-Rull.
Contributors: Quadrini, Vincenzo.; Ríos-Rull, José-Víctor.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13412.; Working paper series (National Bureau of Economic Research) -- working paper no. 13412.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 32
Subjects: Investments, Foreign; Capital movements; Globalization -- Economic aspects; Economic development -- Social aspects -- Econometric models; International finance
Description: It is widely argued that countries can reap large gains from liberalizing their capital accounts if financial globalization is accompanied by the development of domestic institutions and financial markets. However, if liberalization does not lead to financial development, globalization can result in adverse effects on social welfare and the distribution of wealth. We use a multi-country model with non-insurable idiosyncratic risk to show that, if countries differ in the degree of asset market incompleteness, financial globalization hurts the poor in countries with less developed financial markets. This is because in these countries liberalization leads to an increase in the cost of borrowing, which is harmful for those heavily leveraged, i.e. the poor. Quantitative analysis shows that the welfare effects are sizable and may justify policy intervention.
Notes: "September 2007"

Includes bibliographical references (p. 31-32).

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