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.
How Big are the Gains from International Financial Integration?Indrit Hoxha, Sebnem Kalemli-Ozcan and Dietz Vollrath , ( 103 )
Journal of Development Economics