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Financial integration, capital misallocation and global imbalances

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  • Benhima, Kenza

Abstract

This paper shows that in a stylized model with two countries, characterized by different levels of financial development, the following facts can be replicated: 1) persistent current account surpluses and 2) high TFP growth in China. Under autarky, entrepreneurs in the emerging country overinvest in short-term projects and underinvest in long-term projects because short-term assets help them secure long-term investments in the presence of credit constraints. This creates an aggregate misallocation of capital. When financial markets integrate, entrepreneurs with long-term projects can have access to cheaper short-term assets abroad, which leaves them with more resources to invest in their projects. This both reduces capital misallocations and generates capital outflows.

Suggested Citation

  • Benhima, Kenza, 2013. "Financial integration, capital misallocation and global imbalances," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 324-340.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:324-340
    DOI: 10.1016/j.jimonfin.2012.04.009
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    6. Yun Jung Kim & Jing Zhang, 2023. "International Capital Flows: Private Versus Public Flows In Developing And Developed Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 225-260, February.
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    9. Wulff, Alexander & Heinemann, Maik, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113165, Verein für Socialpolitik / German Economic Association.
    10. Damien Cubizol, 2015. "Transition and capital misallocation : the Chinese case," Working Papers 1517, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    11. Cubizol, Damien, 2020. "Rebalancing in China: A taxation approach," China Economic Review, Elsevier, vol. 60(C).
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    More about this item

    Keywords

    Growth; Capital flows; Credit constraints; Financial globalization; Technological change.;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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