Short-run pain, long-run gain: the conditional welfare gains from international financial integration

Raouf Boucekkine (), Giorgio Fabbri and Patrick Pintus

Economic Theory, 2018, vol. 65, issue 2, No 5, 329-360

Abstract: Abstract This paper aims at clarifying the analytical conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on an open-economy $$\textit{AK}$$ AK model in which the capital-deepening effect of financial globalization boosts growth in a in permanent but entails an entry cost in order to access international credit markets. We show that constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth—long-run gain—arise in our preferred model without investment commitment and they range, relative to autarky, from about $$2\%$$ 2 % in middle-income countries to about $$13\%$$ 13 % in OECD-type countries under international financial integration. Sizeable benefits emerge despite the fact that consumption initially falls—short-run pain—which is, however, shown not to dwarf positive growth changes.

Keywords: International financial integration; Collateral-constrained borrowing; Welfare gains; Endogenous growth; Growth breaks (search for similar items in EconPapers)
JEL-codes: F34 F43 O40 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Working Paper: Short-run pain, long-run gain: the conditional welfare gains from international financial integration (2018)
Working Paper: Short-Run Pain, Long-Run Gain: The Conditional Welfare Gains from International Financial Integration (2016)
Working Paper: Short-Run Pain, Long-Run Gain: the Conditional Welfare Gains from International Financial Integration (2012)
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DOI: 10.1007/s00199-016-1019-7

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