Working Paper: CEPR ID: DP11009
Authors: Nicolas Coeurdacier; Hélène Rey; Pablo Winant
Abstract: We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. Our framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing---together with their interaction. In our general equilibrium model, risk sharing brought by financial integration has an effect on the steady-state itself, altering convergence gains from capital accumulation. Because we use global numerical methods, we are able to do meaningful welfare comparisons along the transition paths. Allowing for country asymmetries in terms of risk, capital scarcity and size, we find important differences in the effect of financial integration on output, direction of capital flows, consumption and welfare over time and across countries. This opens the door to a richer set of empirical implications than previously considered in the literature.
Keywords: growth; international capital flows; risk sharing
JEL Codes: F21; F3; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial integration (F30) | Capital allocation efficiency (D61) |
| Financial integration (F30) | Welfare of countries (I30) |
| Interaction between capital accumulation and risk sharing (E22) | Heterogeneous effects across countries (F69) |
| Financial integration (F30) | Capital flow from capital-abundant to capital-scarce countries (F21) |
| Risk sharing (D16) | Steady-state level of capital stock (E22) |
| Risk sharing (D16) | Growth trajectories of countries (O57) |
| Precautionary savings reallocated towards safer developed countries (F32) | Capital outflows from riskier countries (F32) |
| Capital reallocation (E22) | Efficiency gains in riskier countries (O57) |
| Gains from risk sharing (D81) | Gains from capital reallocation (D61) |