Financial Integration and Global Imbalances

Financial integration facilitates more efficient capital allocation and can affect the relationship between consumption and wealth by relaxing consumers' liquidity constraints. There are also adverse effects of financial integration, such as the build-up of larger imbalances, increased financial contagion risks, and sudden capital flow stops. This project studied how international financial integration affects macroeconomic and financial outcomes. More specifically, we studied how financial integration affects international consumption risk sharing, local financial market development, the relationship between consumption and wealth, and how global imbalances affect exchange rate sensitivity to global financial market uncertainty.