International financial integration: Ramsey vs Solow

Philippe Darreau () and Francois Pigalle ()
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Philippe Darreau: University of Limoges
Francois Pigalle: University of Limoges

Economics Bulletin, 2017, vol. 37, issue 2, 1381-1392

Abstract: In this didactical exercice we show that the long run welfare gains from international financial integration differ when using the Solow model vis-Ã -vis the Ramsey model. While the former predicts beneficial effects of financial integration on the wealth and consumption of a poor country borrower in the long run, the latter envisions no change in the borrower's wealth. Moreover, though the Ramsey model presumes an increase in consumption, it is less than what is predicted by the Solow model. We explain this result as follows. With Solow, debt disappears. As income increases with integration, and hence increase national savings, the initial debt transforms itself into national capital and thus there is no more interest burden in steady state. With Ramsey, however, initial debt never disappears. As interest rate and thus national savings decrease with integration, national ownership of capital does not increase and the poor country bears an eternal interest burden.

Keywords: International financial integration; capital flows. (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2017-06-16
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