Growth and Welfare Gains from Financial Integration Under Model Uncertainty

December 7, 2018
By Yulei Luo, Jun Nie and Eric R. Young


Research Working PaperFinancial integration may lead to larger growth and welfare benefits for developed countries than developing countries.

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.

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RWP 18-12, December 2018

JEL Classification: C61, D81, E21

Article Citation

  • Luo, Yulei, Jun Nie, and Eric R. Young. “Growth and Welfare Gains from Financial Integration under Model Uncertainty.” Federal Reserve Bank of Kansas City, Research Working Paper no. 18-12, December. Available at https://doi.org/10.18651/RWP2018-12

Related Research

  • Obstfeld, Maurice. 1994. “Risk-Taking, Global Diversification and Growth.” American Economic Review, vol. 84, no. 5, pp. 1310–1329.
  • Ramey, Garey, and Valerie A. Ramey. 1995. “Cross-Country Evidence on the Link between Volatility and Growth.” American Economic Review, vol. 85, no. 5, pp. 1138–1151.
  • Hansen, Lars Peter, and Thomas J. Sargent. 2007. Robustness. Princeton: Princeton University Press.