Volatility and the Welfare Costs of Financial Market Integration / Pierre-Richard Agenor, Joshua Aizenman.

Format:

Book

Author/Creator:

Agenor, Pierre-Richard.

Contributor:

National Bureau of Economic Research.

Aizenman, Joshua.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6782.

NBER working paper series no. w6782

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

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.

Notes:

Print version record

November 1998.