Working Paper: NBER ID: w15718
Authors: 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.
Keywords: No keywords provided
JEL Codes: F33; F36; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial integration (F30) | expected utility (D81) |
| non-convex technologies (O33) | expected utility (D81) |
| market structure (D49) | systemic risk (E44) |
| financial integration (F30) | bankruptcy cascades (G33) |
| bankruptcy cascades (G33) | systemic risk (E44) |
| financial integration (F30) | adverse outcomes (I12) |