| Abstract: |
Large and persistent global financial imbalances need not be the harbinger of
a world financial crash. Instead, we show that these imbalances can be the
outcome of financial integration when countries differ in financial markets
deepness. In particular, countries with more advanced financial markets
accumulate foreign liabilities in a gradual, long-lasting process. Differences
in financial deepness also affect the composition of foreign portfolios:
countries with negative net foreign asset positions maintain positive net
holdings of non-diversifiable equity and FDI. Abstracting from the potential
impact of globalization on financial development, liberalization leads to
sizable welfare gains for the more financially-developed countries and losses
for the others. Three empirical observations motivate our analysis:
(1)financial deepness varies widely even amongst industrial countries, with
the United States ranking at the 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 capital markets liberalization; (3) net exports and
current account balances are negatively correlated with indicators of
financial development. |