Financial integration facilitates more efficient capital allocation and can affect the relationship between consumption and wealth. There are also adverse effects of financial integration, such as the build-up of larger imbalances, increased risks of financial contagion and sudden capital flow stops.
In her dissertation “Financial Integration and Global Imbalances”, Malin Gardberg looks at how financial integration and global imbalances can have both positive and negative effects on macroeconomic and macrofinancial outcomes. More specifically, her dissertation consists of four empirical studies on how financial integration affects international consumption risk sharing, local financial market development and the relationship between consumption and wealth, and how global imbalances affect the exchange rate sensitivity to global financial market uncertainty.
One important finding is that the composition of a country’s net foreign assets affects the way the country’s exchange rate reacts to financial market turbulence. Debt financed imbalances give rise to much larger swings in the exchange rate during global financial market turbulence, whereas currencies of countries with more FDI or equity financing are much less vulnerable to international financial uncertainty. This vulnerability differs also between different owners, as private net foreign debt heightens the exchange rate sensitivity much more than public.
Another important contribution to the literature is that financial integration has affected the long run relationship between consumption and wealth by relaxing the liquidity constraints of consumers. International financial integration also facilitates international consumption risk sharing by improving the international hedging possibilities of households. This applies especially to less developed countries, where the local financial markets are less developed. A higher share of poor households however reduces risk sharing, as higher poverty means that less households can afford to save and hedge their consumption risks internationally.
Finally, the last chapter finds that substantial foreign currency savings (deposit dollarisation) slow down local financial market development, leading to a lower level of credit to GDP. Potential explanations to this finding are that partial dollarisation leads to higher balance sheet risks, and that banks invest the foreign currency deposits abroad instead of extending credit in the domestic financial market.
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Malin Gardberg will defend her dissertation on 6 December 2018.