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Contagion, Liberalization, and the Optimal Structure of Globalization

Stiglitz, Joseph E.

Advocates of capital market liberalization argue that it leads to greater stability: countries faced with a negative shock borrow from the rest of the world, allowing cross-country smoothing. There is considerable evidence against this conclusion. This paper explores one reason: integration can exacerbate contagion; a failure in one country can more easily spread to others. It derives conditions under which such adverse effects overwhelm the putative positive effects. It explains how capital controls can be welfare enhancing, reducing the risk of adverse effects from contagion. This paper presents an analytic framework within which we can begin to address broader questions of optimal economic architectures.

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Title
Journal of Globalization and Development
DOI
https://doi.org/10.2202/1948-1837.1149

More About This Work

Academic Units
Business
Published Here
June 18, 2012
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