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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 international financial integration are very small. We revisit the existing findings and document that welfare gains can be substantial if capital goods are not perfect substitutes. We use a model of optimal savings that includes a production function where the elasticity of substitution between capital varieties is less then 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 growth literature. Calibrating the model, our results are that welfare gains from financial integration are equivalent to a 9% increase in consumption for the median developing country, and up to 14% for the most capital-scarce. These gains rise substantially if capital’s share in output increases even modestly above the baseline value of 0.3, and remain large even if inflows of foreign capital after integration are limited to a fraction of the existing capital stock.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8647.

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Date of creation: Nov 2011
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Handle: RePEc:cpr:ceprdp:8647

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Keywords: FDI; financial integration; neoclassical growth model; productivity; welfare;

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Citations

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Cited by:
  1. Christian Friedrich & Isabel Schnabel & Jeromin Zettelmeyer, 2010. "Financial integration and growth - Is emerging Europe different?," Working Papers 123, European Bank for Reconstruction and Development, Office of the Chief Economist.
  2. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.
  3. Kym Anderson & Anna Strutt, 2012. "Agriculture and Food Security in Asia by 2030," Macroeconomics Working Papers 23309, East Asian Bureau of Economic Research.
  4. Frankel, Jeffrey A., 2011. "Monetary Policy in Emerging Markets: A Survey," Scholarly Articles 4669671, Harvard Kennedy School of Government.
  5. 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.
  6. Kym Anderson, 2012. "Costing Global Trade Barriers, 1900 to 2050," Departmental Working Papers 2012-08, The Australian National University, Arndt-Corden Department of Economics.
  7. 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.
  8. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
  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. 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.
  11. Engler, Philipp & Wulff, Alexander, 2011. "Opposition to capital market opening," Discussion Papers 2011/17, Free University Berlin, School of Business & Economics.

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