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On the individual optimality of economic integration

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  • CASTRO, Rui
  • KOUMTINGUÉ, Nelnan

Abstract

Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.

Suggested Citation

  • CASTRO, Rui & KOUMTINGUÉ, Nelnan, 2014. "On the individual optimality of economic integration," Cahiers de recherche 2014-07, Universite de Montreal, Departement de sciences economiques.
    • Handle: RePEc:mtl:montde:2014-07
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    File URL: http://hdl.handle.net/1866/11343
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    Cited by:

    1. Pierre M. Picard & Tim Worrall, 2015. "Currency Areas and Voluntary Transfers," CREA Discussion Paper Series 15-12, Center for Research in Economic Analysis, University of Luxembourg.
    2. Wang RUI, 2015. "A critical review of regional economic integration in China," Turkish Economic Review, KSP Journals, vol. 2(2), pages 88-103, June.

    More about this item

    Keywords

    Incomplete markets; endogenous borrowing constraints; risk sharing; economic integration;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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