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Financial Integration, Growth, and Volatility

  • Anne Epaulard
  • Aude Pommeret

The aim of this paper is to evaluate the welfare gains from financial integration for developing and emerging market economies. To do so, we build a stochastic endogenous growth model for a small open economy that can (i) borrow from the rest of the world, (ii) invest in foreign assets, and (iii) receive foreign direct investment (FDI). The model is calibrated on 32 emerging market and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is about 10 percent of initial wealth. Compared with financial autarky, actual levels of financial integration translate into slightly higher annual growth rates (around 0.4 percentage point per year.)

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/67.

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Length: 37
Date of creation: 01 Apr 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/67
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  1. repec:rus:hseeco:70549 is not listed on IDEAS
  2. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  3. Hali J. Edison & Ross Levine & Luca Ricci & Torsten Slok, 2002. "International Financial Integration and Economic Growth," NBER Working Papers 9164, National Bureau of Economic Research, Inc.
  4. Peter Blair Henry, 2003. "Capital Account Liberalization, The Cost of Capital, and Economic Growth," NBER Working Papers 9488, National Bureau of Economic Research, Inc.
  5. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
  6. Marco Terrones & Eswar S Prasad & Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  7. Pierre-Olivier Gourinchas & Olivier D Jeanne, 2004. "The Elusive Gains from International Financial Integration," IMF Working Papers 04/74, International Monetary Fund.
  8. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Growth Volatility and Financial Liberalization," NBER Working Papers 10560, National Bureau of Economic Research, Inc.
  9. Buch, Claudia M. & Doepke, Joerg & Pierdzioch, Christian, 2005. "Financial openness and business cycle volatility," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 744-765, September.
  10. Tille, Cedric, 2005. "The welfare effect of international asset market integration under nominal rigidities," Journal of International Economics, Elsevier, vol. 65(1), pages 221-247, January.
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