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Financial liberalization and contagion with unobservable savings

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  • Panetti, Ettore

Abstract

How does the presence of decentralized market-based channels for borrowing and lending affect financial integration and financial contagion? To answer this question, I develop a two-country model of financial intermediation, where banks have access to country-specific investment technologies, and agents can borrow and lend in an international hidden market. In this environment, the possibility of hidden borrowing and lending has three main effects. First, it improves welfare with respect to the autarkic equilibrium, by allowing gains from “hidden” financial integration. Second, it halts the process of “official” financial integration. Third, it lowers the resilience of the economy to unexpected shocks to fundamentals.

Suggested Citation

  • Panetti, Ettore, 2014. "Financial liberalization and contagion with unobservable savings," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 20-35.
    • Handle: RePEc:eee:finana:v:36:y:2014:i:c:p:20-35
    DOI: 10.1016/j.irfa.2014.05.005
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    Cited by:

    1. Ettore Panetti, 2017. "A Theory of Bank Illiquidity and Default with Hidden Trades," Review of Finance, European Finance Association, vol. 21(3), pages 1123-1157.
    2. Panetti, Ettore, 2011. "Unobservable savings, risk sharing and default in the financial system," MPRA Paper 29542, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial intermediation; Liberalization; Financial contagion; Hidden trades;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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