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Volatile capital flows and financial integration: The role of moral hazard

Kikuchi, Tomoo; Stachurski, John; Vachadze, George

Description

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....[Show more]

CollectionsANU Research Publications
Date published: 2018
Type: Journal article
URI: http://hdl.handle.net/1885/143600
Source: Journal of Economic Theory
DOI: 10.1016/j.jet.2018.03.009

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