TY - JOUR
T1 - Volatile capital flows and financial integration
T2 - The role of moral hazard
AU - Kikuchi, Tomoo
AU - Stachurski, John
AU - Vachadze, George
N1 - Funding Information:
The financial support of Singapore Ministry of Education Academic Research Fund Tier 1 R122000140112 , Lee Kuan Yew School of Public Policy Academic Research Fund R603000165720 , College of Staten Island Provost's Research Scholarship Award and Australian Research Council Discovery Grant DP120100321 is gratefully acknowledged. We thank Joydeep Bhattacharya, Takashi Kamihigashi, Danny Quah, Kiminori Matsuyama and Masaya Sakuragawa for their helpful comments, as well as Chenghan Hou and Mrijan Rimal for excellent research assistance.
Publisher Copyright:
© 2018 Elsevier Inc.
PY - 2018/7
Y1 - 2018/7
N2 - We study a model in which income and capital flows between countries are jointly determined in a world economy with integrated financial markets. In a setting that combines risky entrepreneurial activity with moral hazard, we find that a shift from autarky to financial integration leads to boom-bust cycles in capital flows, output and consumption. Moral hazard causes cycles because financial intermediaries incentivize effort by insisting entrepreneurs take an equity share in their own projects. The size of this stake rises with wealth, discouraging entrepreneurship and inhibiting capital formation. The reverse is true when wealth falls, generating cycles.
AB - We study a model in which income and capital flows between countries are jointly determined in a world economy with integrated financial markets. In a setting that combines risky entrepreneurial activity with moral hazard, we find that a shift from autarky to financial integration leads to boom-bust cycles in capital flows, output and consumption. Moral hazard causes cycles because financial intermediaries incentivize effort by insisting entrepreneurs take an equity share in their own projects. The size of this stake rises with wealth, discouraging entrepreneurship and inhibiting capital formation. The reverse is true when wealth falls, generating cycles.
KW - Capital flows
KW - Cycles
KW - Financial integration
KW - Moral hazard
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U2 - 10.1016/j.jet.2018.03.009
DO - 10.1016/j.jet.2018.03.009
M3 - Article
AN - SCOPUS:85056211540
SN - 0022-0531
VL - 176
SP - 170
EP - 192
JO - Journal of Economic Theory
JF - Journal of Economic Theory
ER -