English, Article, Journal or magazine article edition: Rethinking the effects of financial liberalization Fernando Broner; Jaume Ventura

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Bookmark: http://trove.nla.gov.au/version/155437
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Rethinking the effects of financial liberalization
Author
  • Fernando Broner
  • Jaume Ventura
Physical Description
  • preprint
Notes
  • During the last few decades, emerging markets have lifted most restrictions on international asset trade. The conventional view was that (i) capital would flow into these countries raising investment and growth; (ii) these countries would use international capital markets to smooth productivity, terms-of-trade, and other shocks and achieve less volatile consumption; and (iii) financial integration would encourage the development of domestic financial markets, leading to a more efficient domestic allocation of capital and better sharing of individual risks. But in those emerging markets that liberalized their financial markets, average net capital flows have been small and even negative, volatile and procyclical. As a result, (i) investment and growth have not only not increased but even declined in some cases; (ii) consumption has become more volatile; and (iii) domestic financial markets have become unstable and prone to crises. In this paper, we present a simple model of financial liberalization that can account for these observations. The key friction in the model is sovereign risk. What makes this model different from previous models of sovereign risk is the existence of gains from domestic asset trade and that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments. This makes the theory more realistic both in terms of assumptions and results.
  • Financial liberalization, sovereign risk, enforcement, capital flows
  • RePEc:upf:upfgen:1128
Language
  • English
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