Financial Integration, Financial Development, and Global Imbalances

Abstract

Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt. (c) 2009 by The University of Chicago. All rights reserved..

An OLG model of global imbalances

“…Caballero et al [7] explain global imbalances as the result of a negative shock to emerging countries' level of financial development, while our view is that global imbalances arose as the outcome of the financial integration between the US and emerging economies. In this respect, this paper is closer to Mendoza et al [24] and Angeletos et al [1].…”

“…Caballero et al [7], Mendoza et al [24] and Angeletos et al [1]. The focus of these papers is on financial markets' different stages of development, and yet the sense of our analysis is similar as the type of pension system enforced in a country affects saving and investment possibilities.…”

International reserves for emerging economies: A liquidity approach

“…Some prominent studies, such as, Caballero, Farhi, and Gourinchas (2008);Mendoza, Quadrini, and Rios-Rull (2009), emphasize local assets' lack of pledgeability or emerging markets' financial underdevelopment as major sources of the excess global demand for U.S. assets, such as U.S. T-Bonds. However, these arguments are not entirely satisfactory given that the rapid reserve accumulation trend does not seem to have slowed down even in the aftermath of the U.S. financial market turmoil and the U.S. debt fiasco.…”

From internal imbalances to global imbalances: a survey on the causes of China’s export-led growth

“…A reduction of these financial frictions over time might generate capital deepening in both firm types, while going ahead with even stronger increases in aggregate savings because of low initial wealth of workers. These inefficiencies in the financial sector therefore help to explain why significant parts of China's capital are invested abroad while at the same time domestic returns are high and China attracts a huge amount of foreign direct investments (see also Caballero et al, 2008a;Mendoza et al, 2009;Mao and Yao, 2012). 9 The importance of retained profits for financing investment also helps to explain already high and in recent years further increasing corporate savings .…”

“…Cooper 2007, Caballero et al 2008a, Mendoza et al, 2009, others argued that they have the potential to threaten global macroeconomic stability (e.g. Krugman 2007, Obstfeld andRogoff 2007).…”