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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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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
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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Cited by:

  1. Engler, Philipp & Wulff, Alexander, 2011. "Opposition to capital market opening," Discussion Papers 2011/17, Free University Berlin, School of Business & Economics.
  2. Christian Friedrich & Isabel Schnabel & Jeromin Zettelmeyer, 2010. "Financial Integration and Growth -Is Emerging Europe Different?," Working Papers 1013, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 17 Nov 2010.
  3. Frankel, Jeffrey A., 2011. "Monetary Policy in Emerging Markets: A Survey," Scholarly Articles 4669671, Harvard Kennedy School of Government.
  4. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
  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. 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. 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.
  8. 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.
  9. 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.
  10. Jonathan Temple & Huikang Ying & Patrick Carter, 2014. "Transfers and Transformations: Remittances, Foreign Aid, and Growth," Bristol Economics Discussion Papers 14/649, Department of Economics, University of Bristol, UK, revised 02 Dec 2014.
  11. 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.
  12. Karen K. Lewis, 2011. "Global Asset Pricing," NBER Working Papers 17261, National Bureau of Economic Research, Inc.

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