Working Paper: CEPR ID: DP3902
Authors: Pierre-Olivier Gourinchas; Olivier Jeanne
Abstract: Standard theoretical arguments tell us that countries with relatively little capital benefit from financial integration as foreign capital flows in and speeds up the process of convergence. We show in a calibrated neoclassical model that conventionally measured welfare gains from this type of convergence appear relatively limited for the typical emerging country. The welfare gain from switching from financial autarky to perfect capital mobility is roughly equivalent to a 1% permanent increase in domestic consumption for the typical emerging economy. This is negligible relative to the potential welfare gain of a take-off in domestic productivity of the magnitude observed in some countries.
Keywords: capital flows; convergence; development accounting; international financial integration
JEL Codes: F02; F20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial openness (F30) | Domestic welfare (I38) |
| Transitioning from financial autarky to perfect capital mobility (F32) | Welfare gain equivalent to a permanent increase in consumption (D69) |
| International financial integration (F30) | Convergence between developed and developing economies (F62) |
| Productivity differences (O49) | Limited gains from financial integration (F30) |
| Capital stock increases (E22) | Average gains from financial integration (F30) |