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

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 collateral-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 - are shown to be robust to relaxing the assumption of investment commitment, which generates growth breaks and hampers welfare. For reasonable parameter values and relative to autarky, welfare gains range 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 when the economy switches from autarky to financial integration - short-run pain - which is however shown not to dwarf positive welfare changes.

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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 12-14.

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Length: 46 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:eve:wpaper:12-14
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