International Financial Integration in the Presence of an International Duopoly

Abstract

We revisit the debate on the benefits of international financial integration. We build a two-country model with an international duopoly to examine how the liberalization of international capital flows, affects the welfare of each country and their joint welfare. Our results show that international capital flows' liberalization cannot guarantee the improvement in each country's welfare and their joint welfare. Overall, we find that international financial integration has very heterogeneous effects, depending on the market size, the initial level of capital stock and the degree of product competition.

Keywords: International financial integration, international capital flows liberalization, imperfect competition

JEL Classification: F12, F15, F21