Financial Integration and Growth in a Risky World

We revisit the debate on the benefits of financial integration by providing a unified framework able to account for gains from capital accumulation and risk sharing. We consider a two-country neoclassical growth model with aggregate uncertainty. We allow for country asymmetries in terms of volatility, capital scarcity and size. In our general equilibrium model, financial integration has an effect on the steady-state itself. Because we use global numerical methods we are able to do meaningful welfare comparisons along the transition paths. We find differences in the effect of financial integration on growth, consumption and welfare over time and across countries. This opens the door to a much richer set of empirical implications than previously considered in the literature. JEL Classification: F36, F41, F43, F65.