Risk and global economic architecture

Description

"This paper provides a general framework for analyzing the optimal degree and form of financial integration. Full integration is not in general optimal: faced with a choice between two polar regimes, full integration or autarky, autarky may be superior. The intuition is simple: if underlying technologies are not convex, then risk-sharing can lower expected utility. The simplistic models arguing for financial integration typically employed in economics assume convexity; but the world is rife with non-convexities, e.g. associated with bankruptcy. The architecture of the credit market can, for instance, affect the likelihood of a bankruptcy cascade, "contagion," and systemic risk"--National Bureau of Economic Research web site.

Subjects

Series Statement

• NBER working paper series -- working paper 15718
• Working paper series (National Bureau of Economic Research : Online) -- working paper no. 15718.

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