Paper #1128

Title:

Rethinking the effects of financial globalization

Authors:

Fernando Broner and Jaume Ventura

Date:

October 2010 (Revised: October 2015)

Abstract:

During the last few decades, many emerging markets lifted restrictions on cross-border financial transactions. In this paper, we present a simple model that can account for the observed effects of financial globalization. The model emphasizes the role of imperfect enforcement of domestic debts and the interactions between domestic and foreign debts. Financial globalization can lead to a variety of outcomes: (i) domestic capital flight and ambiguous effects on net capital flows, investment, and growth; (ii) capital inflows and higher investment and growth; or (iii) volatile capital flows and unstable domestic financial markets. The model shows how the effects of financial globalization depend on the level of development, productivity, domestic savings, and the quality of institutions.

Keywords:

financial globalization, sovereign risk, enforcement, capital flows, economic growth.

JEL codes:

F34, F36, F43, G15, O19, O43.

Area of Research:

Macroeconomics and International Economics

Published in:

Quarterly Journal of Economics, 131 (3), 1497-1542, 2016

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