Financial Integration, Growth, and Volatility

Anne Epaulard and Aude Pommeret

No 2005/067, IMF Working Papers from International Monetary Fund

Abstract: 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.)

Keywords: WP; certainty equivalent; open economy; risk premium; optimal portfolio; Financial Integration; Risk-sharing; Endogenous Growth; Stochastic Growth; autarky economy; welfare gain; consumption-saving decision; economy benefit; FDI flow; gain from FDI; Foreign direct investment; Consumption; Return on investment; Global; Asia and Pacific (search for similar items in EconPapers)
Pages: 37
Date: 2005-04-01
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Financial Integration, Growth and Volatility (2016)
Working Paper: Financial Integration, Growth and Volatility (2016)
Working Paper: Financial Integration, Growth, and Volatility (2004)
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