Author(s): Raouf Boucekkine 1 , Giorgio Fabbri 1 , Patrick A. Pintus 2
(Aff1) 0000 0001 2176 4817, grid.5399.6, Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, , Marseille, France
(Aff2) 0000 0004 0639 0193, grid.466529.a, Banque de France, , 41-1422 DEMFI-POMONE, 75049, Paris Cedex 01, France
Whether the capital-deepening effect of financial globalization generates welfare gains or losses is a concern that haunts academics and policymakers alike. According to the "textbook view," which is aptly summarized in Broner and Ventura (2010), opening up capital accounts in a frictionless world should lead to larger investment, faster growth and ultimately welfare improvements. Increasingly, however, the recent theoretical literature is questioning such a rosy view and, more precisely, is predicting ambiguous effects of liberalization on welfare. To mention but a few recent contributions, Mendoza et al. (2009) show that financial globalization without financial development may result in adverse effects on social welfare and the distribution of wealth, (Antràs and Caballero 2009, 2011) stress that long-run consumption may go either up or down relative to autarky depending on financial frictions, while Aoki et al. (2010) underline that different groups might gain or loose after liberalizing international asset transactions. Because most papers belonging to this literature assume that long-run growth is either nonexistent or exogenous; however, the question of whether or not welfare improves when international financial integration is growth-enhancing can hardly be addressed.
This paper aims at clarifying the conditions under which welfare gains arise when the main benefit from financial globalization is to boost growth in a permanent way, once an entry cost is paid in order to access international credit markets. Although a permanent effect on growth may seem a rather extreme property, it accords with recent papers that empirically document strong growth effects of financial globalization across space and time [e.g., Rancière et al. (2008), Schularick and Steger (2010)]. On the other hand, the assumption that an autarkic country has to pay a sunk cost in order to access debt markets can be justified by some monitoring process that the international lender, e.g. a foreign bank, goes through in order to assess the level and quality of collateral in the prospective debtor country. In addition, one could think of other issuance costs attached to syndicated loans or bond issuances, such as disclosure-related costs, as well as bank and other legal fees. For simplicity, we assume that such a once-and-for-all entry cost is proportional to the initial capital stock, which turns out to be mathematically equivalent to the assumption that debt contracting does not lead to additional capital instantaneously but, in contrast, triggers a once-and-for-all transfer toward the rest of the world. Then capital accumulation and growth improve because of access to international debt market.
Table 1: Welfare gains from international financial integration relative to autarky with investment commitment, under Assumption 4.1
Welfare gains in case (i )
Welfare gains in case (ii )