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;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2018-12-07

Number: RWP 18-12

Pages: 46 pages