Working Paper: NBER ID: w21817
Authors: Nicolas Coeurdacier; Hélène Rey; Pablo Winant
Abstract: The debate on the benefits of financial integration is revisited in a two-country neoclassical growth model with aggregate uncertainty. Gains from more efficient capital allocation and gains from risk sharing are accounted for simultaneously|together with their interaction. Global numerical methods allow for meaningful welfare comparisons. Gains from integration are quantitatively small, even for riskier and capital scarce emerging economies. These countries import capital for efficiency reasons before exporting it for self-insurance, leading to capital ows and growth reversals along the transition. This opens the door to a richer set of empirical implications than previously considered in the literature.
Keywords: financial integration; growth; risk sharing; capital allocation
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) | efficient allocation of capital (G31) |
| efficient allocation of capital (G31) | growth in capital-scarce countries (O57) |
| financial integration (F30) | capital flows from developed to emerging countries (F32) |
| capital flows from developed to emerging countries (F32) | initial increase in growth rates (O41) |
| initial increase in growth rates (O41) | subsequent outflow of capital (F21) |
| subsequent outflow of capital (F21) | dampening of long-term growth prospects (E66) |
| financial integration (F30) | limited overall welfare gains (D69) |
| risk-sharing benefits are somewhat substitutive (D16) | limiting overall welfare gains from financial integration (F65) |
| expected utility of financial integration (G19) | lower for riskier countries (F34) |
| financial integration (F30) | modest benefits for riskier countries (F35) |