Open Economies Review

, Volume 30, Issue 1, pp 179–190 | Cite as

A Pedagogical Note on Risk Sharing Versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz

  • Raouf BoucekkineEmail author
  • Benteng Zou
Research Article


The pure risk sharing mechanism implies that financial liberalization is growth enhancing for all countries as the world portfolio shifts from safe low-yield capital to riskier high-yield capital. This result is typically obtained under the assumption that the volatilities for risky assets prevailing under autarky are not altered after liberalization. We relax this assumption within a simple two-country model of intertemporal portfolio choices. By doing so, we put together the risk sharing effect and a well-defined instability effect. We identify the conditions under which liberalization may cause a drop in growth. These conditions combine the typical threshold conditions outlined in the literature, which concern the deep characteristics of the economies, and size conditions on the instability effect induced by liberalization.


Economic growth Financial liberalization Risk sharing Volatility Emerging markets 

JEL Classification

F21 G15 O16 O41 



We thank three anonymous referees for their careful reviewing. Geert Bekaert, Fausto Gozzi and Patrick Pintus are gratefully acknowledged for useful discussions.


  1. Bae K, Chan K, Ng A (2004) Investability and return volatility. J Financ Econ 71:239–263CrossRefGoogle Scholar
  2. Bekaert G, Harvey C (2000) Foreign speculators in emerging equity markets. J Financ 55:565–613CrossRefGoogle Scholar
  3. Bekaert G, Harvey C, Lundblad C (2005) Does financial liberalization spur growth? J Financ Econ 77(1):3–56CrossRefGoogle Scholar
  4. Bekaert G, Harvey C, Lundblad C (2006) Growth volatility and financial liberalization. J Int Money Financ 25:370–403CrossRefGoogle Scholar
  5. Boucekkine R, Pintus P (2012) History’s a curse: leapfrogging, growth breaks and growth reversals under international borrowing without commitment. J Econ Growth 17:27–47CrossRefGoogle Scholar
  6. Boucekkine R, Fabbri G, Pintus P (2018) Short-run pain, long-run gain: the conditional welfare gains from international financial integration. Economic Theory 65:329–360CrossRefGoogle Scholar
  7. Eichengreen B (2001) Capital account liberalization: what do cross-country studies tell us. The World Bank Economic Review 15(3):341–365CrossRefGoogle Scholar
  8. Harvey C (1995) Predictable risk and returns in emerging markets. Studies Rev Financ Stud 8:773–816CrossRefGoogle Scholar
  9. Kitano S, Takaku K (2017) Capital controls and financial frictions in a small open economy. Open Econ Rev 28:761–793CrossRefGoogle Scholar
  10. Kose M, Prasad ES, Taylor AD (2011) Thresholds in the process of international financial integration. J Int Money Financ 30:147–179CrossRefGoogle Scholar
  11. Levine R (2001) International financial liberalization and economic growth. Rev Int Econ 9(4):688–702CrossRefGoogle Scholar
  12. Merton R (1971) Optimum consumption and portfolio rules in a continuous-time model. J Econ Theory 3:373–413CrossRefGoogle Scholar
  13. Moshirian F (2008) Globalisation, growth and institutions. J Bank Financ 32:472–479CrossRefGoogle Scholar
  14. Obstfeld M (1994) Risk-taking, global diversification and growth. Am Econ Rev 85:1310–1329Google Scholar
  15. Prasad E, Rogoff K, Wei S, Kose M (2003) Effects of financial globalization on developing countries: some empirical evidence. Working paper 220, International Monetary FundGoogle Scholar
  16. Ramey G, Ramey V (1995) Cross-Country Evidence on the link between volatility and growth. The Am Econ Rev 85(5):1138–1151Google Scholar
  17. Stiglitz J (2000) Capital market liberalization, economic growth and instability. World Dev 26(6):1075–1086CrossRefGoogle Scholar
  18. Umutlu M, Akdeniz L, Altay-Salih A (2010) The degree of financial liberalization and aggregated stock-return volatility in emerging markets. J Bank Financ 34:509–521CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Aix-Marseille University (IMéRA and AMSE), and senior member of the Institut Universitaire de FranceMarseilleFrance
  2. 2.CREAUniversity of LuxembourgLuxembourg CityLuxembourg

Personalised recommendations