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

No 15718, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F33 F36 G32 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-bec, nep-cba and nep-lam
Note: IFM
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Citations: View citations in EconPapers (123)

Published as 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 388-92, May.

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Journal Article: Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable (2010)
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