How big are the gains from international financial integration?

Indrit Hoxha, Sebnem Kalemli-Ozcan, Dietrich Vollrath

Research output: Contribution to journalArticle

13 Scopus citations

Abstract

The literature has shown that the implied welfare gains from financial integration are very small. We revisit these findings and document that welfare gains are substantial if capital goods are not perfect substitutes. We use a model of optimal savings where the elasticity of substitution between capital varieties is less than infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the literature. Calibrating the model, welfare gains from financial integration are equivalent to a 9% increase in consumption for the median country, and 14% for the most capital-scarce. This rises substantially if capital's share in output increases even modestly above 0.3, and remains large if inflows of foreign capital are limited to a fraction of the existing capital stock.

Original languageEnglish (US)
Pages (from-to)90-98
Number of pages9
JournalJournal of Development Economics
Volume103
Issue number1
DOIs
StatePublished - Jul 2013

All Science Journal Classification (ASJC) codes

  • Development
  • Economics and Econometrics

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