Financial Integration, Growth, and Volatility

April 1, 2005

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Format: Chicago

Anne Epaulard, and Aude Pommeret. Financial Integration, Growth, and Volatility, (USA: International Monetary Fund, 2005) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The aim of this paper is to evaluate the welfare gains from financial integration for developing and emerging market economies. To do so, we build a stochastic endogenous growth model for a small open economy that can (i) borrow from the rest of the world, (ii) invest in foreign assets, and (iii) receive foreign direct investment (FDI). The model is calibrated on 32 emerging market and developing economies for which we evaluate the upper bound for the welfare gain from financial integration. For plausible values of preference parameters and actual levels of financial integration, the mean welfare gain from financial integration is about 10 percent of initial wealth. Compared with financial autarky, actual levels of financial integration translate into slightly higher annual growth rates (around 0.4 percentage point per year.)

Subject: Balance of payments, Consumption, External debt, Financial integration, Financial markets, Foreign direct investment, National accounts, Return on investment

Keywords: Asia and Pacific, Autarky economy, Certainty equivalent, Consumption, Consumption-saving decision, Economy benefit, Endogenous Growth, FDI flow, Financial Integration, Foreign direct investment, Gain from FDI, Global, Open economy, Optimal portfolio, Return on investment, Risk premium, Risk-sharing, Stochastic Growth, Welfare gain, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/067
Stock No:

WPIEA2005067
ISBN:

9781451860863
ISSN:

1018-5941

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