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On the Welfare Implications of Financial Globalization without Financial Development / Enrique G. Mendoza, Vincenzo Quadrini, José-Victor Ríos-Rull.
- Format:
- Book
- Author/Creator:
- Mendoza, Enrique G.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w13412.
- NBER working paper series no. w13412
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2007.
- Summary:
- 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:
- Print version record
- September 2007.
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