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Unformatted text preview: The gains from financial globalization fall, broadly speaking, in three categories. Describe and comment on each of them. Mishkin et al (2009) find extra benefits of foreign capital (see Third thoughts on foreign capital, The Economist, November 16th, 2006) Reference 2). Taking into account the theoretical and empirical insights on capital flows movements, present the main arguments on this issue. Consumption Smoothing- Elimination of undesirable fluctuations in aggregate consumption - Prevents over consumption- Closed Vs. Open Economies o Closed Output = Consumption No trade with the world, shock must adjust immediately; no trade to smooth fluctuations in domestic consumption levels Consumption volatility o Open Shock reduces production temporarily run trade deficit and borrow from the world Consumption smoothing Financial transactions enable smooth consumption fluctuations and make households better off The more open an economy is the lower ratio of consumption volatility relative to output volatility - Allows countries to save for a rainy day Efficient Investment- Openness delivers gains in the investment side also by creating better ways to augm capital stock and to take advantage of new production opportunities o When you have an open economy with Investment and Permanent Shock the economy can run a trade deficit to finance investment and consumption in period And when output is higher in later periods it can run a trade surplus...
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- Fall '10