Financial Integration and Growth in a Risky World

Nicolas Coeurdacier (1, 2) , Hélène Rey (3, 2, 4) , Pablo Winant (5)

1 ECON - Département d'économie (Sciences Po)
2 CEPR - Center for Economic Policy Research
3 London Business School
4 NBER - National Bureau of Economic Research [New York]
5 Bank of England

We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. The framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing—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 flows and growth reversals along the transition. This opens the door to richer empirical implications than previously considered in the literature.

Keywords: Financial integration; Capital flows; Risky steady-state; Global solutions

Domains: Humanities and Social Sciences; Economics and Finance

Nicolas Coeurdacier, Hélène Rey, Pablo Winant. Financial Integration and Growth in a Risky World. Journal of Monetary Economics, 2020, 112 (.), pp.1-21. ⟨10.1016/j.jmoneco.2019.01.022⟩. ⟨hal-03799686⟩