Financial Integration and Growth in a Risky World
53 Pages Posted: 21 Dec 2015 Last revised: 3 Jan 2016
Date Written: December 2015
The debate on the benefits of financial integration is revisited in a two-country neoclassical growth model with aggregate uncertainty. Gains from more efficient capital allocation and gains from risk sharing are accounted for simultaneously|together with their interaction. Global numerical methods allow for meaningful welfare comparisons. Gains from integration are quantitatively small, even for riskier and capital scarce emerging economies. These countries import capital for efficiency reasons before exporting it for self-insurance, leading to capital ows and growth reversals along the transition. This opens the door to a richer set of empirical implications than previously considered in the literature.
Suggested Citation: Suggested Citation