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Short-Run Pain, Long-Run Gain: The Conditional Welfare Gains from International Financial Integration The Conditional Welfare Gains from International Financial Integration

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Abstract

This paper aims at clarifying the conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on the capital-deepening effect of financial globalization in an open-economy AK model and we show that constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth - long-run gain - arise in our preferred model without investment commitment, which turns out to be a candidate to solve the “allocation puzzle”. For reasonable parameter values and relative to autarky, welfare gains range in our preferred model from about 2% in middle-income countries to about 13% in OECD-type countries under international financial integration. Sizeable benefits emerge despite the fact that consumption falls - short-run pain - and that welfare-reducing growth breaks materialize when the economy switches from autarky to financial integration, which is however shown not to dwarf positive welfare changes.

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  • Raouf Boucekkine & Giorgio Fabbri & Patrick Pintus, 2012. "Short-Run Pain, Long-Run Gain: The Conditional Welfare Gains from International Financial Integration The Conditional Welfare Gains from International Financial Integration," AMSE Working Papers 1202, Aix-Marseille School of Economics, Marseille, France, revised 27 Jun 2016.
  • Handle: RePEc:aim:wpaimx:1202
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    Cited by:

    1. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2013. "On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 101-112, March.
    2. Mauro Bambi & Cristina Girolami & Salvatore Federico & Fausto Gozzi, 2017. "Generically distributed investments on flexible projects and endogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 521-558, February.

    More about this item

    Keywords

    International Financial Integration; Collateral-Constrained Borrowing; Welfare Gains; Endogenous Growth; Growth Breaks;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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