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

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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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  • Raouf Boucekkine & Giorgio Fabbri & Patrick A. Pintus, 2012. "Short-Run Pain, Long-Run Gain : the Conditional Welfare Gains from International Financial Integration," Documents de recherche 12-14, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:12-14
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    Cited by:

    1. Fabbri, Giorgio, 2017. "International borrowing without commitment and informational lags: Choice under uncertainty," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 103-114.
    2. Marwân-al-Qays Bousmah & Daria Onori, 2016. "Financial Openness, Aggregate Consumption and Threshold Effects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 358-380, August.
    3. 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.
    4. Anne Epaulard & Aude Pommeret, 2016. "Financial Integration, Growth and Volatility," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 330-357, August.
    5. Boucekkine, R. & Fabbri, G. & Pintus, P., 2014. "Growth and financial liberalization under capital collateral constraints: The striking case of the stochastic AK model with CARA preferences," Economics Letters, Elsevier, vol. 122(2), pages 303-307.
    6. Raouf Boucekkine & Benteng Zou, 2017. "A note on risk sharing versus instability in international financial integration: When Obstfeld meets Stiglitz," CREA Discussion Paper Series 17-19, Center for Research in Economic Analysis, University of Luxembourg.
    7. 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.
    8. repec:ebl:ecbull:eb-17-00214 is not listed on IDEAS

    More about this item

    Keywords

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

    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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