Growth and Welfare Gains from Financial Integration Under Model Uncertainty

RePEc Short ID: pyo3
ORCID iD: 0000-0001-9703-4095

Luo, Yulei; Nie, Jun; Young, Eric

Working Paper

Growth and Welfare Gains from Financial Integration Under Model Uncertainty

Abstract: We build a robustness (RB) version of the Obstfeld (1994) model to study the effects of financial integration on growth and welfare. Our model can account for the empirically observed heterogeneity in the relationship between growth and volatility for different countries. The calibrated model shows that financial integration leads to significantly larger gains in growth and welfare for advanced countries than developing countries, with some developing countries experiencing growth and welfare loss in financial integration. Our analytical solutions help uncover the key mechanisms by which this happens.

Keywords: Robustness; Model Uncertainty; Financial Integration; Risk Sharing; Economic Growth; Welfare;

JEL Classification: C61; D81; E21;