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Short-Run Pain, Long-Run Gain: The Conditional Welfare Gains from International Financial Integration The Conditional Welfare Gains from International Financial Integration

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Author Info

  • Raouf Boucekkine

    ()
    (Aix-Marseille Université, Greqam and UCL, Ires-Core)

  • Giorgio Fabbri

    ()
    (Università di Napoli Parthenope and UCL, Ires)

  • Patrick Pintus

    ()
    (Aix-Marseille Université, Greqam-Idep and Institut Universitaire de France)

Abstract

This paper aims at clarifying the conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on the capital-deepening effect of financial globalization in an open-economy AK model and we show that constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - arise in our preferred model without investment commitment, which turns out to be a candidate to solve the “allocation puzzle”. For reasonable parameter values and relative to autarky, welfare gains range in our preferred model from about 2% in middle-income countries to about 13% in OECD-type countries under international financial integration. Sizeable benefits emerge despite the fact that consumption falls - short-run pain - and that welfare-reducing growth breaks materialize when the economy switches from autarky to financial integration, which is however shown not to dwarf positive welfare changes.

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1202.

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Length: 52 pages
Date of creation: 12 Feb 2012
Date of revision: 12 Feb 2012
Handle: RePEc:aim:wpaimx:1202

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Web page: http://www.amse-aixmarseille.fr/en
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Related research

Keywords: International Financial Integration; Collateral-Constrained Borrowing; Welfare Gains; Growth Breaks; Leapfrogging;

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References

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  1. Romain Rancière & Aaron Tornell & Frank Westermann, 2002. "Systemic crises and growth," Economics Working Papers 854, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2004.
  2. Cuberes, David & Jerzmanowski, Michal, 2008. "Democracy, Diversification, and Growth Reversals," MPRA Paper 11646, University Library of Munich, Germany.
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  14. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "Leapfrogging, Growth Reversals and Welfare," Working Papers halshs-00576743, HAL.
  15. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 63-111, April.
  16. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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  18. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "On the optimal control of a linear neutral differential equation arising in economics," Working Papers halshs-00576770, HAL.
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Cited by:
  1. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2012. "On the Timing and Optimality of Capital Controls: Public Expenditures, Debt Dynamics and Welfare," Working Papers halshs-00793196, HAL.

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