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Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable

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  • Joseph E. Stiglitz

Abstract

This paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, "contagion," and systemic risk.
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Suggested Citation

  • Joseph E. Stiglitz, 2010. "Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable," American Economic Review, American Economic Association, vol. 100(2), pages 388-392, May.
    • Handle: RePEc:aea:aecrev:v:100:y:2010:i:2:p:388-92
    Note: DOI: 10.1257/aer.100.2.388
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    References listed on IDEAS

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    1. Joseph E. Stiglitz, 2004. "Capital-market Liberalization, Globalization, and the IMF," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 20(1), pages 57-71, Spring.
    2. Gallegati Mauro & Greenwald Bruce & Richiardi Matteo G & Stiglitz Joseph E., 2008. "The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-22, September.
    3. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    4. Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Russo, Alberto & Stiglitz, Joseph E., 2006. "Business fluctuations in a credit-network economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 68-74.
    5. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521810340, January.
    6. David M. G. Newbery & Joseph E. Stiglitz, 1984. "Pareto Inferior Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 1-12.
    7. Dalit Contini & Annette Riehl & Andrea Scagni, 2007. "The Role of Family Background on Secondary School Choices," LABORatorio R. Revelli Working Papers Series 72, LABORatorio R. Revelli, Centre for Employment Studies.
    8. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 229-264.
    9. Stiglitz Joseph E., 2010. "Contagion, Liberalization, and the Optimal Structure of Globalization," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-47, December.
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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