NSD Assistant Prof's Paper Published

Sep 18-2019   

One of the top economics publications The Review of Economic Studies has accepted and published a paper by NSD Assistant Prof. Yu Changhua and Prof. Michael B. Devereux of the University of British Columbia.

The paper, International Financial Integration and Crisis Contagion, examines the cross-border conduit mechanism of international financial integration and financial crisis based on the dynamic general equilibrium between two countries.

According to the paper, the international financial integration passes through three phases: non-open financial markets, open debt markets, and open debt and equity markets. The research by the two professors finds that international financial integration diversifies cross-border risks while also pushing up domestic borrowing leverage when credit constraints (financial frictions) exist in domestic financial markets. Steeper leverage entails higher probability of domestic financial crisis and cross-border contagion. However, financial integration, through diversification of risks, can mitigate the losses of a financial crisis. Therefore, the balancing act concerns higher probability of crisis contagion and lower losses in the case of a financial crisis.

This conclusion is effectively supported by statistics of developing and developed countries. As for social welfare, financial integration might be a double-edged sword, depending on the environments facing that particular economic entity.