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How big are the gains from international financial integration?

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Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S0304387813000163
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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
DOI: 10.1016/j.jdeveco.2013.02.003
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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

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Find related papers by JEL classification:
  • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
  • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What is the Neo-classical Growth Model good for?
    by dvollrath in The Growth Economics Blog on 2015-08-28 21:01:43
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