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Global Diversification, Growth, and Welfare with Imperfectly Integrated Markets for Goods

  • Dumas, Bernard
  • Uppal, Raman

In this article we examine the effect of the imperfect mobility of goods on international risk sharing and, through that, on the investment in risky projects, welfare, and growth. Our main result is that the welfare gain from integration of financial markets is not greatly reduced by the presence of goods market imperfections, modeled as a cost of transferring goods from one country to the other. We also find that the gain is nonmonotonic with respect to investors' risk aversion and the aggregate volatility of output growth. The policy implication to be drawn is that financial market integration is a worthwhile goal to pursue even when full goods mobility has not been achieved. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 14 (2001)
Issue (Month): 1 ()
Pages: 277-305

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Handle: RePEc:oup:rfinst:v:14:y:2001:i:1:p:277-305
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  1. Alan C. Stockman, 1987. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  2. Wheatley, Simon, 1988. "Some tests of international equity integration," Journal of Financial Economics, Elsevier, vol. 21(2), pages 177-212, September.
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