Financial Globalization: Unequal Blessings

• Published in: International finance (Oxford, England) Vol. 5; no. 3; pp. 335 - 357
• Main Authors: De La Torre, Augusto, Yeyati, Eduardo Levy, Schmukler, Sergio L.
• Format: Journal Article
• Language: English
• Published: Oxford, UK and Boston, USA Blackwell Publishers Ltd 01.11.2002; Wiley Blackwell
• Series: International Finance
• ISSN: 1367-0271; 1468-2362
• DOI: 10.1111/1468-2362.00100

This paper presents a framework to analyse financial globalization. It argues that financial globalization needs to take into account the relation between money (particularly in its role as store of value), asset and factor price flexibility, and contractual and regulatory institutions. Countries that have the ‘blessed trinity’ (international currency, flexible exchange rate regime, and sound contractual and regulatory environment) can integrate successfully into the (imperfect) world financial markets. Developing countries, though, normally display the ‘unblessed trinity’ (weak currency, fear of floating, and weak institutional framework). The paper defines and discusses two alternative avenues (a ‘dollar trinity’ and a ‘peso trinity’) for developing countries to safely embrace international financial integration while the blessed trinity remains beyond reach.