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How big are the gains from international financial integration?

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  • Hoxha, Indrit
  • Kalemli-Ozcan, Sebnem
  • Vollrath, Dietrich

Abstract

The literature has shown that the implied welfare gains from financial integration are very small. We revisit these findings and document that welfare gains are substantial if capital goods are not perfect substitutes. We use a model of optimal savings where the elasticity of substitution between capital varieties is less than infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the literature. Calibrating the model, welfare gains from financial integration are equivalent to a 9% increase in consumption for the median country, and 14% for the most capital-scarce. This rises substantially if capital's share in output increases even modestly above 0.3, and remains large if inflows of foreign capital are limited to a fraction of the existing capital stock.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 103 (2013)
Issue (Month): C ()
Pages: 90-98

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Handle: RePEc:eee:deveco:v:103:y:2013:i:c:p:90-98

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Productivity; Neoclassical growth model; Welfare; FDI; Financial integration;

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Citations

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Cited by:
  1. Frankel, Jeffrey A., 2011. "Monetary Policy in Emerging Markets: A Survey," Scholarly Articles 4669671, Harvard Kennedy School of Government.
  2. Friedrich, Christian & Schnabel, Isabel & Zettelmeyer, Jeromin, 2010. "Financial Integration and Growth - Is Emerging Europe Different?," CEPR Discussion Papers 8137, C.E.P.R. Discussion Papers.
  3. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.
  4. Engler, Philipp & Wulff, Alexander, 2011. "Opposition to capital market opening," Discussion Papers 2011/17, Free University Berlin, School of Business & Economics.
  5. Kym Anderson & Anna Strutt, 2012. "Agriculture and Food Security in Asia by 2030," Macroeconomics Working Papers 23309, East Asian Bureau of Economic Research.
  6. Friedrich, Christian & Schnabel, Isabel & Zettelmeyer, Jeromin, 2013. "Financial integration and growth — Why is Emerging Europe different?," Journal of International Economics, Elsevier, vol. 89(2), pages 522-538.
  7. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
  8. Anderson, Kym & Strutt, Anna, 2012. "Asia’s Growth, the Changing Geography of World Trade, and Food Security: Projections to 2030," CEPR Discussion Papers 8950, C.E.P.R. Discussion Papers.
  9. Anderson, Kym & Strutt, Anna, 2012. "Global food markets by 2030: What roles for farm TFP growth and trade policies?," 2012 Conference (56th), February 7-10, 2012, Freemantle, Australia 124192, Australian Agricultural and Resource Economics Society.
  10. Kym Anderson, 2012. "Costing Global Trade Barriers, 1900 to 2050," Departmental Working Papers 2012-08, The Australian National University, Arndt-Corden Department of Economics.
  11. Anderson, Kym & Strutt, Anna, 2012. "The changing geography of world trade: Projections to 2030," Journal of Asian Economics, Elsevier, vol. 23(4), pages 303-323.

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