Alessandra Dal Colle Stievano :
014_DP29 Intermediation and Growth in Financially Open Economies
JEL Classification:
E44,F43,G21
Abstract:
This article aims to offer a contribution to the debate on the pros and cons of higher financial openness with respect to growth. It analyses two closed economies instantaneously open to trade and financial movements. Openness to trade is without frictions and entails a built-in positive shock to capital productivity.Internationalisation of banking may be allowed either under Commercial Presence (CP) mode - whereby banks of any origin can establish anywhere but at a higher set up costs - or under the Cross Border (CB) mode, whereby banks offering their services over the phone or other media, can only count on the domestic saving pool to finance their activity. The point of view in the paper is that of a benevolent risk-adverse regulator who cares for their own costs in terms of recapitalisation of the financial system in case of crisis.
Results show that the financially open economy may show a higher growth than the financially autarkic one after a certain capital per capita threshold, depending on the asymmetric impact on fixed and variable costs in the dierent modes of operation, but the net regulatory burden, defined as the bail-out costs in case of a crisis, always increases. Also a low capital per capita former autarkic country wishing to integrate with a higher capital per capita country should choose the CB mode of operation to reap the benefit of a higher growth at earlier stage of development.
