Financial Integration, Capital Misallocation and Global Imbalances

The paper shows that in a stylized model with two countries, characterized bydifferent levels of nancial development, the following facts can be replicated: 1)persistent current account surpluses and 2) high TFP growth in China. Because ofliquidity shocks and credit constraints, investment by entrepreneurs with long-termprojects is depressed. The behavior of these entrepreneurs has two other importantfeatures: (i) their demand for bonds is "excessive"; (ii) bonds and long-term invest-ment are complements, in the sense that a decrease in the price of bonds (i.e. anincrease in the interest rate) has a positive effect on investment in long-term projects,while it has a negative effect on investment in short-term projects which are not sub-mitted to liquidity shocks. The rst feature depresses the autarky price of bonds,so the emerging economy experiences an increase in the interest rate and capitaloutows when nancial markets integrate. The second one makes short-term andlong-term investments move in opposite directions, so nancial integration generatesTFP gains through a better allocation of capital.[...]