Making%20International%20Financial%20Integration%20Work%20for%20Low%2DSaving%20Countries

Working Papers

Making International Financial Integration Work for Low-Saving Countries


CODE: IDB-WP-823
AUTHOR(s): Cavallo, Eduardo A. , Fernández-Arias, Eduardo , Marzani, Matias
PUBLISHED: July 2017
LANGUAGE: English
RELATED TOPICS: Macroeconomics
DOWNLOAD FILE IN: English

Abstract:

Deeper financial integration is expected to enable low-saving countries to increase domestic investment but also to increase crisis risks by facilitating the accumulation of risky foreign liabilities. This paper explores the connections between financial integration, investment and crisis risk to assess this tradeoff. It confirms expectations but also finds that the accumulation of safe foreign assets that financial integration brings is an important risk offset that in many cases even eliminates the risk factor from the tradeoff altogether. Furthermore, it shows that the risk features of assets and liabilities depend on their type. Ultimately, whether international financial integration is in fact a reliable remedy for individual countries critically depends on the portfolio composition of their foreign assets and liabilities.

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