Rethinking the effects of financial globalization

Broner, Fernando; Ventura, Jaume

doi:http://dx.doi.org/10.1093/qje/qjw010

Rethinking the effects of financial globalization

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Broner F, Ventura J. Rethinking the effects of financial globalization. The Quarterly Journal of Economics. 2016 Aug;131(3):1497-542. DOI: 10.1093/qje/qjw010

Abstract

During the past three decades, many countries have lifted restrictions on cross-border financial transactions. 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.