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Evaluating international financial integration in a center-periphery economy

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  • Yu, Changhua

Abstract

Does opening up capital markets facilitate risk diversification across borders? Are all countries gradually better off in the process of international financial integration? This paper explores welfare implications for various countries in a center-periphery framework with endogenous portfolio choice. Financial integration is divided into four stages: financial autarky, two-country integration, center-periphery integration and global integration. Two effects from financial integration emerge: diversification effects and financial terms of trade effects. Results show that financial integration between the center and a new periphery in center-periphery integration generates welfare losses for the peripheral country already integrated and welfare gains for the central country. Allowing for financial integration between peripheries in global integration leads the welfare in the center to deteriorate. From two-country integration directly to global integration, the large country gains, while the small one loses.

Suggested Citation

  • Yu, Changhua, 2015. "Evaluating international financial integration in a center-periphery economy," Journal of International Economics, Elsevier, vol. 95(1), pages 129-144.
  • Handle: RePEc:eee:inecon:v:95:y:2015:i:1:p:129-144
    DOI: 10.1016/j.jinteco.2014.10.008
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    Cited by:

    1. Billio, M. & Donadelli, M. & Paradiso, A. & Riedel, M., 2017. "Which market integration measure?," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 150-174.
    2. Monica Billio & Michael Donadelli & Antonio Paradiso & Max Riedel, 2015. "Measuring Financial Integration: Lessons from the Correlation," Working Papers 2015:23, Department of Economics, University of Venice "Ca' Foscari".
    3. repec:kap:iecepo:v:15:y:2018:i:2:d:10.1007_s10368-017-0395-1 is not listed on IDEAS

    More about this item

    Keywords

    Financial integration; International risk sharing; Portfolio choice; Market size; Welfare analysis;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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