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Financial Integration and Growth in a Risky World

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  • Coeurdacier, Nicolas
  • Rey, Hélène
  • Winant, Pablo

Abstract

We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. Our framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing---together with their interaction. In our general equilibrium model, risk sharing brought by financial integration has an effect on the steady-state itself, altering convergence gains from capital accumulation. Because we use global numerical methods, we are able to do meaningful welfare comparisons along the transition paths. Allowing for country asymmetries in terms of risk, capital scarcity and size, we find important differences in the effect of financial integration on output, direction of capital flows, consumption and welfare over time and across countries. This opens the door to a richer set of empirical implications than previously considered in the literature.

Suggested Citation

  • Coeurdacier, Nicolas & Rey, Hélène & Winant, Pablo, 2015. "Financial Integration and Growth in a Risky World," CEPR Discussion Papers 11009, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11009
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    10. Bhattacharya, Mita & Inekwe, John Nkwoma & Valenzuela, Maria Rebecca, 2018. "Financial integration in Africa: New evidence using network approach," Economic Modelling, Elsevier, vol. 72(C), pages 379-390.
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    12. Inaba, Kei-Ichiro, 2020. "Information-driven stock return comovements across countries," Research in International Business and Finance, Elsevier, vol. 51(C).
    13. Fogli, Alessandra & Perri, Fabrizio, 2015. "Macroeconomic volatility and external imbalances," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 1-15.
    14. Flavia Corneli, 2017. "Medium and long term implications of financial integration without financial development," Temi di discussione (Economic working papers) 1120, Bank of Italy, Economic Research and International Relations Area.
    15. Inaba, Kei-Ichiro, 2021. "An empirical illustration of the integration of sovereign bond markets," Journal of Multinational Financial Management, Elsevier, vol. 61(C).
    16. Michael Donadelli & Patrick Grüning & Aurelija Proskute, 2019. "Monetary policy, trade, and endogenous growth under different international financial market structures," Bank of Lithuania Working Paper Series 57, Bank of Lithuania.
    17. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, C.E.P.R. Discussion Papers.
    18. Lustig, Hanno & Stathopoulos, Andreas & Verdelhan, Adrien, 2016. "Nominal Exchange Rate Stationarity and Long-Term Bond Returns," Research Papers 3411, Stanford University, Graduate School of Business.
    19. Isabel Schnabel & Christian Seckinger, 2014. "Financial Fragmentation and Economic Growth in Europe," Working Papers 1502, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 13 Feb 2014.
    20. McQuade, Peter & Schmitz, Martin, 2017. "The great moderation in international capital flows: A global phenomenon?," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 188-212.
    21. Flavia Corneli, 2021. "Financial Integration Without Financial Development," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 49(2), pages 201-220, June.
    22. Mathias Hoffmann & Egor Maslov & Bent E. Sørensen & Iryna Stewen, 2018. "Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone," ECON - Working Papers 311, Department of Economics - University of Zurich.
    23. Mathias Hoffmann & Egor Maslov & Bent E. Sørensen & Iryna Stewen, 2019. "Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 443-495, September.
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    Keywords

    Growth; International capital flows; Risk sharing;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F3 - International Economics - - International Finance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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