Financial Globalization: Unequal Blessings*

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. *We thank Benn Steil (the editor), Rick Mishkin, Guillermo Perry, Luis Servén, two anonymous referees, and seminar participants at the ECLAC (UN)-World Bank conference on globalization (Santiago, Chile 2002) and the World Bank 2002 Finance Forum for very helpful comments. We thank Marina Halac for excellent research assistance. The views expressed in this paper are entirely those of the authors and do not necessarily represent the views of the institution