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Abstract:
We estimate potential welfare gains from financial integration and corresponding better insurance against country-specific shocks to output (risk sharing) for the twenty-five European Union countries. Using theoretical utility-based measures we express the gains from risk sharing as the utility equivalent of a permanent increase in consumption. We report positive potential welfare gains for all the EU countries if they move toward full risk sharing. Ten country-members who joined the Union in 2004 have more volatile or counter-cyclical consumption and output and would obtain much higher potential gains than the longer-standing fifteen members.

EU enlargement, financial integration, welfare gains, risk sharing

Abstract:
Access to world capital markets and net investment income flows between countries help protect national income from country-specific output shocks. I empirically study what factors explain cross-country differences in the extent of risk sharing from international factor income. An index of investor protection is the leading causal variable for the estimated amount of risk sharing over the 1985--2004 period. Improving investor protection in Russia to Denmark's level implies five times larger risk sharing compared to the sample average. These results indicate one possible way to reap large potential benefits from international risk sharing.

Financial markets integration, income insurance, risk sharing, investor protection

Abstract:
I show that the principal components analysis can be used to quantify the degree of economic integration, trace its evolution over time, and capture episodes of market segmentation. Based on long series of sovereign bond data for fifteen industrialized economies I document clear evidence of higher financial markets integration at the end of the 20th century compared to the earlier periods (J-shaped trend with a trough as early as the 1920s). Countries' sovereign bond markets were much more segmented prior to World War I than in the following periods.

financial markets integration, principal components, sovereign bonds

Abstract:
We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries the "Lucas Paradox." The theoretical explanations include differences in fundamentals across countries and capital market imperfections. We show that during 1970-2000 low institutional quality is the leading explanation. For example, improving Peru`s institutional quality to Australia`s level, implies a quadrupling of foreign investment. Recent studies emphasize the role of institutions for achieving higher levels of income, but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.

Abstract:
We describe the patterns of international capital flows in the period 1970-2000. We then examine the determinants of capital flows and capital flows volatility during this period. We find that institutional quality is an important determinant of capital flows. Historical determinants of current legal institutions have a direct effect on foreign investments. Policy plays a significant role in explaining the changes in the level of capital flows over time and their volatility.

Abstract:
We study the degree of output and consumption asymmetry for the ten new and fifteen original European Union members during the period 1994-2001. We establish basic stylized facts about macroeconomic asymmetry from correlations of GDP and consumption growth rates with corresponding aggregates. In addition, we determine which countries would potentially gain the most from international risk sharing within the European Union employing a utility-based measure suggested by Kalemli-Ozcan, Sorensen and Yosha (2001). We find much higher potential gains for the new members compared to those for original EU-15 countries. In particular, economies with the most volatile and counter-cyclical output growth - Czech Republic, Slovak Republic, and the three Baltic states - might benefit the most. We show that EU enlargement would not reduce the welfare of EU-15 members. If these countries move towards full risk sharing, their potential welfare gains after enlargement would be virtually unchanged.

EU enlargement, asymmetry of GDP, risk sharing, consumption insurance