TY  - JOUR
AU  - Hoxha,Indrit
AU  - Kalemli-Ozcan,Sebnem
AU  - Vollrath,Dietrich
TI  - How Big are the Gains from International Financial Integration?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14636
PY  - 2009
Y2  - January 2009
UR  - http://www.nber.org/papers/w14636
L1  - http://www.nber.org/papers/w14636.pdf
N1  - Author contact info:
Indrit Hoxha
University of Houston
Department of Economics
Houston, TX 77204
Tel: 832-573-4170
E-Mail: indrit.hoxha@mail.uh.edu

Sebnem Kalemli-Ozcan
Koc University
CASE 101
34450 Highway Rumelifeneri
Sariyer Istanbul
Turkey
E-Mail: sebnem.kalemli-ozcan@mail.uh.edu

Dietrich Vollrath
University of Houston
201C McElhinney Hall
Houston, TX 77204
Tel: 713-743-3806
E-Mail: devollrath@uh.edu
AB  - 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 if capital goods are not perfect substitutes. We use a model of optimal savings that includes a production function where the elasticity of substitution between capital varieties is less then infinity, but more than the value that would generate endogenous growth. This production structure is consistent with empirical estimates of the actual elasticity of substitution between capital types, as well as with the relatively slow speed of convergence documented in the growth literature. Calibrating the model, our results are that welfare gains from financial integration are equivalent to a 9% increase in consumption for the median developing country, and up to 14% for the most capital-scarce. These gains rise substantially if capital’s share in output increases even modestly above the baseline value of 0.3, and remain large even if inflows of foreign capital after integration are limited to a fraction of the existing capital stock.
ER  -