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

  • Raouf Boucekkine

    ()

    (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales)

  • Giorgio Fabbri

    ()

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

  • Patrick A. Pintus

    ()

    (DGEI-DEMFI-POMONE – Banque de France)

This paper aims at clarifying the analytical conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on an open-economy AK model in which the capital-deepening effect of financial globalization boosts growth in a in permanent but entails an entry cost in order to access international credit markets. 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 and they range, relative to autarky, 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 initially falls - short-run pain - which is however shown not to dwarf positive growth changes.

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Date of creation: Jun 2016
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Handle: RePEc:hal:wpaper:halshs-00790569
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