Financial Integration, Growth, and Volatility

38 Pages Posted: 3 Mar 2006

See all articles by Anne Epaulard

Anne Epaulard

Université Paris IX Dauphine

Aude Pommeret

University of Lausanne

Date Written: April 2005

Abstract

The aim of this paper is to evaluate the welfare gains from financial integration for developing and emerging market economies. To do so, we build a stochastic endogenous growth model for a small open economy that can (i) borrow from the rest of the world, (ii) invest in foreign assets, and (iii) receive foreign direct investment (FDI). The model is calibrated on 32 emerging market and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is about 10 percent of initial wealth. Compared with financial autarky, actual levels of financial integration translate into slightly higher annual growth rates (around 0.4 percentage point per year.)

Keywords: Financial Integration, Risk-sharing, Endogenous Growth, Stochastic Growth

JEL Classification: E13, F20, F36, F3, F43, O41

Suggested Citation

Epaulard, Anne and Pommeret, Aude, Financial Integration, Growth, and Volatility (April 2005). IMF Working Paper No. 05/67, Available at SSRN: https://ssrn.com/abstract=888113

Anne Epaulard (Contact Author)

Université Paris IX Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Aude Pommeret

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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