The Elusive Gains from International Financial Integration

Abstract:     
Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging country. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1% permanent increase in domestic consumption for the typical emerging economy. This is negligible relative to the potential welfare gain of a take-off in domestic productivity of the magnitude observed in some countries.

Number of Pages in PDF File: 43

Keywords: International financial integration, capital flows, development accounting, convergence

JEL Classification: F02, F20

working papers series