Growth and Welfare Gains from Financial Integration Under Model Uncertainty

48 Pages Posted: 12 Dec 2018

See all articles by Yulei Luo

Yulei Luo

University of Hong Kong

Jun Nie

Federal Reserve Bank of Kansas City

Eric R. Young

University of Virginia

Date Written: December 7, 2018

Abstract

We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this happens.

Keywords: Robustness, Model Uncertainty, Financial Integration, Risk Sharing, Economic Growth, Welfare

JEL Classification: C61, D81, E21

Suggested Citation

Luo, Yulei and Nie, Jun and Young, Eric R., Growth and Welfare Gains from Financial Integration Under Model Uncertainty (December 7, 2018). Federal Reserve Bank of Kansas City Working Paper No. 18-12. Available at SSRN: https://ssrn.com/abstract=3297824 or http://dx.doi.org/10.2139/ssrn.3297824

Yulei Luo (Contact Author)

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Jun Nie

Federal Reserve Bank of Kansas City ( email )

1 Memorial Drive
Kansas City, MO 64198
United States
(816) 881-2255 (Phone)
(816) 881-2199 (Fax)

HOME PAGE: http://homepages.nyu.edu/~jn461/research.htm

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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