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Evaluating international financial integration in a center-periphery economy

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  • Yu, Changhua

Abstract

Does opening up capital markets facilitate risk diversification across borders? Are all countries gradually better off in the process of international financial integration? This paper explores welfare implications for various countries in a center-periphery framework with endogenous portfolio choice. Financial integration is divided into four stages: financial autarky, two-country integration, center-periphery integration and global integration. Two effects from financial integration emerge: diversification effects and financial terms of trade effects. Results show that financial integration between the center and a new periphery in center-periphery integration generates welfare losses for the peripheral country already integrated and welfare gains for the central country. Allowing for financial integration between peripheries in global integration leads the welfare in the center to deteriorate. From two-country integration directly to global integration, the large country gains, while the small one loses.

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  • Yu, Changhua, 2015. "Evaluating international financial integration in a center-periphery economy," Journal of International Economics, Elsevier, vol. 95(1), pages 129-144.
    • Handle: RePEc:eee:inecon:v:95:y:2015:i:1:p:129-144
    DOI: 10.1016/j.jinteco.2014.10.008
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    5. Monica Billio & Michael Donadelli & Antonio Paradiso & Max Riedel, 2015. "Measuring Financial Integration: Lessons from the Correlation," Working Papers 2015:23, Department of Economics, University of Venice "Ca' Foscari".
    6. Billio, M. & Donadelli, M. & Paradiso, A. & Riedel, M., 2017. "Which market integration measure?," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 150-174.
    7. Liu, Tao & Wang, Xiaosong & Woo, Wing Thye, 2019. "The road to currency internationalization: Global perspectives and chinese experience," Emerging Markets Review, Elsevier, vol. 38(C), pages 73-101.
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    9. Biplab Bhattacharjee & Muhammad Shafi & Animesh Acharjee, 2017. "Investigating the Evolution of Linkage Dynamics among Equity Markets Using Network Models and Measures: The Case of Asian Equity Market Integration," Data, MDPI, vol. 2(4), pages 1-28, December.
    10. Devereux, Michael B. & Saito, Makoto & Yu, Changhua, 2020. "International capital flows, portfolio composition, and the stability of external imbalances," Journal of International Economics, Elsevier, vol. 127(C).
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    More about this item

    Keywords

    Financial integration; International risk sharing; Portfolio choice; Market size; Welfare analysis;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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