This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow fa...

in this paper, we first review shortly movements in international monetary system and various theories of capital flows including portfolio and balance of payments approaches. then, we will focus particularly on feldstein- horioka (f-h) approach by which capital mobility is analyzed for 16 developing countries over 1980-2003 through a panel data method. the main objective of this paper is thus ...

Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insuffic...

Conventional wisdom suggests that countries that are more financially integrated can better insure against risk. Despite widespread deregulation and financial integration in recent history, there is little evidence that countries have increased risk sharing. This work shows financial integration does not necessarily lead to significant improvement in risk sharing if financial contracts are inco...

The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years. There seems to be a consensus that financial globalization has had a "discipline effect" on monetary policy, because it has reduced the returns from using monetary policy to stabilize the output. As a result, monetary policy over recent years has placed more emphasis o...

In simple one-good international macro models, the presence of non-diversifiable labor income risk means that country portfolios should be heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international diversification puzzle. We embed a portfolio choice decision in a frictionless two-country, two-good version of ...

This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. Intuitively, the implementation of a single currency for these countries means replacing several fluctuating currencies by a common currency. This gives rise to both “level” and “risk” effects of r...

We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term debt contracts subject to standard contracting frictions: the country cannot commit to repay its debts nor to a speci…c path of future debt issues, and contracts cannot be made state contingent nor renegotiated. We show that in order to satisfy incentive compatibility the country...