Short-run pain, long-run gain: the conditional welfare gains from international financial integration

This paper aims at clarifying the analytical conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on an open-economy AK model in which the capital-deepening effect of financial globalization boosts growth in a in permanent but entail...

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Bibliographic Details
Published inEconomic theory Vol. 65; no. 2; pp. 329 - 360
Main Authors Boucekkine, Raouf, Fabbri, Giorgio, Pintus, Patrick A.
Format Journal Article
LanguageEnglish
Published Berlin/Heidelberg Springer 01.03.2018
Springer Berlin Heidelberg
Springer Nature B.V
Springer Verlag
Subjects
Analysis
Capital
Consumption
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Endogenous
Financial markets
Foreign banks
Game Theory
Globalization
Growth rate
Humanities and Social Sciences
Interest rates
International finance
International markets
Markets
Microeconomics
Pain
Public assistance
Public Finance
Quantitative Finance
Research Article
Social and Behav. Sciences
Welfare benefits
United States
Collateral-constrained borrowing
F43
Endogenous growth
F34
International financial integration
Welfare gains
Growth breaks
O40
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Summary:This paper aims at clarifying the analytical conditions under which financial globalization originates welfare gains in a simple endogenous growth setting. We focus on an open-economy AK model in which the capital-deepening effect of financial globalization boosts growth in a in permanent but entails an entry cost in order to access international credit markets. We show that constrained borrowing triggers substantial welfare gains, even at small levels of international financial integration, provided that the autarkic growth rate is larger than the world interest rate. Such conditional welfare benefits boosted by stronger growth—long-run gain—arise in our preferred model without investment commitment and they range, relative to autarky, from about 2% in middle-income countries to about 13% in OECD-type countries under international financial integration. Sizeable benefits emerge despite the fact that consumption initially falls—short-run pain—which is, however, shown not to dwarf positive growth changes.
ISSN:0938-2259
1432-0479
DOI:10.1007/s00199-016-1019-7