Does Capital Scarcity Matter?

This paper quantifies the welfare impact of a permanent increase in the level of per capita income brought about by a temporary growth effect following financial liberalization. We find that a lion’s share of the welfare benefits from financial liberalization accrue over relatively short horizons, and in the early years after the policy is implemented. Evaluating welfare gains from liberalizations under an infinite time horizon underestimates the gains enjoyed in the early years following liberalization as differences in the consumption paths in autarky and integration are large soon after liberalization. Yet the welfare impact of these differences is small when welfare gains are calculated using infinite horizon consumption streams. Calculating welfare benefits over finite horizons may be more appropriate and policy-relevant for evaluating policy changes such as financial liberalization that lead to temporary growth effects but permanent level effects on per capita incomes. *Not for circulation. Please do not quote.