Does Financial Integration Increase Welfare? Evidence From International Household-Level Data

This paper uses international household-level data to assess the impact of financial integration on welfare across countries and across households. The analysis uses two balanced panels of more than 17,000 and 31,000 households from up to 22 European countries over the periods 1994-2000 and 2004-2008. The dependent variable is a household’s personal assessment of its ability to make the ends of its balance sheet meet. I argue that this measure reflects an evaluation of the relationship between current income and an implicit expenditure benchmark in utility terms. I first document a negative welfare effect arising from labor income uncertainty. I then show that financial integration significantly mitigates this effect for the average household in the sample. Finally, I assess the distribution of these gains by splitting up households according to their exposure to financial markets. Although most differential effects are statistically significant, the degree of heterogeneity in the effect of financial integration on welfare turns out to be relatively low. Altogether, my results suggest that the benefits from financial integration are primarily of an indirect nature and are likely driven by the relaxation of households’ credit constraints.