How big are the gains from international financial integration?

Abstract

The literature has shown that the implied welfare gains from international financial integration are very small. We revisit the existing findings and document that welfare gains can be substantial under two scenarios: a) the costs of remaining in autarky are worse than the standard neo-classical model would predict, and b) financial integration has a direct affect on total factor productivity. By estimating the implied path of convergence of rates of return from the actual data and calibrating the welfare gains based on this path, we find that the benefits are nearly 4.3 times larger than the previous estimates. We also find welfare gains are at least 2 times larger than those estimated ignoring the productivity effect. The combined effect of realistic convergence and endogenous productivity as a result of financial integration is equivalent to a nearly 15% permanent increase in consumption.

Dynamic aid allocation

“…Staying closer to our current framework, other possibilities include country-specific population and technical progress dynamics, costs of distortionary taxation in the donor, adjustment costs in the North for aid disbursements, finite-duration aid commitments by the donor, CES production technologies, and the introduction of capital varieties; see Hoxha et al (2013) on the latter. A more ambitious extension would introduce output volatility in the South, so that aid would have an additional insurance role.…”

The internationalisation of monetary policy

“…Others argue, however, that globalisation allows for further diversification and insurance opportunities such that the impact of foreign shocks in fact diminishes. As a result, it is easier to achieve domestic targets and the need for coordination falls (Edmond et al, 2012;Hoxha et al, 2013). In general, it is difficult to predict which of these effects will dominate.…”

Would Freeing Up World Trade Reduce Poverty and Inequality? The Vexed Role of Agricultural Distortions

“…Freeing global trade in services is also likely to bring gains to most national economies, including their farmers (Francois and Hoekman, 2010). Freeing international capital flows would add to those gains (Hoxha et al, 2009), as would freeing the international movement of low‐skilled labour from developing to higher‐income countries (Walmsley and Winters, 2005; World Bank, 2005). How those reforms would interact with farm and other goods trade reforms, in terms of their impacts on global poverty and inequality, is bound to be complex and so awaits the development of more‐sophisticated global simulation models.…”