How big are the gains from international financial integration?

Indrit Hoxha (), Sebnem Kalemli-Ozcan and Dietrich Vollrath

Journal of Development Economics, 2013, vol. 103, issue C, 90-98

Abstract: The literature has shown that the implied welfare gains from financial integration are very small. We revisit these findings and document that welfare gains are substantial if capital goods are not perfect substitutes. We use a model of optimal savings where the elasticity of substitution between capital varieties is less than infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the literature. Calibrating the model, welfare gains from financial integration are equivalent to a 9% increase in consumption for the median country, and 14% for the most capital-scarce. This rises substantially if capital's share in output increases even modestly above 0.3, and remains large if inflows of foreign capital are limited to a fraction of the existing capital stock.

Keywords: Productivity; Neoclassical growth model; Welfare; FDI; Financial integration (search for similar items in EconPapers)
JEL-codes: F36 F41 F43 O4 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Working Paper: How Big are the Gains from International Financial Integration? (2011)
Working Paper: How Big are the Gains from International Financial Integration? (2009)
Working Paper: HOW BIG ARE THE GAINS FROM INTERNATIONAL FINANCIAL INTEGRATION? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:103:y:2013:i:c:p:90-98

DOI: 10.1016/j.jdeveco.2013.02.003

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