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How Big are the Gains from International Financial Integration?

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  • Indrit Hoxha
  • Sebnem Kalemli-Ozcan
  • Dietrich Vollrath

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14636.

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Date of creation: Jan 2009
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Handle: RePEc:nbr:nberwo:14636

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Citations

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Cited by:
  1. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.
  2. Anderson, Kym & Strutt, Anna, 2012. "Agriculture and Food Security in Asia by 2030," ADBI Working Papers 368, Asian Development Bank Institute.
  3. Kym Anderson, 2012. "Costing Global Trade Barriers, 1900 to 2050," Departmental Working Papers 2012-08, The Australian National University, Arndt-Corden Department of Economics.
  4. Engler, Philipp & Wulff, Alexander, 2011. "Opposition to capital market opening," Discussion Papers 2011/17, Free University Berlin, School of Business & Economics.
  5. 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.
  6. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
  7. 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.
  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.

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