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

Date

2018

Authors

Kikuchi, Tomoo
Stachurski, John
Vachadze, George

Journal Title

Journal ISSN

Volume Title

Publisher

Elsevier

Abstract

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.

Description

Keywords

Citation

Source

Journal of Economic Theory

Type

Journal article

Book Title

Entity type

Access Statement

Open Access

License Rights

DOI

10.1016/j.jet.2018.03.009

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