Financial Integration, Growth, and Volatility

Author/Editor:

Anne Epaulard ; Aude Pommeret

Publication Date:

April 1, 2005

Electronic Access:

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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.)

Series:

Working Paper No. 2005/067

Subject:

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

English

Publication Date:

April 1, 2005

ISBN/ISSN:

9781451860863/1018-5941

Stock No:

WPIEA2005067

Pages:

37

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