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Global Diversification, Growth, and Welfare with Imperfectly Integrated Markets for Goods

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  • Dumas, Bernard
  • Uppal, Raman

Abstract

In this article we examine the effect of the imperfect mobility of goods on international risk sharing and, through that, on the investment in risky projects, welfare, and growth. Our main result is that the welfare gain from integration of financial markets is not greatly reduced by the presence of goods market imperfections, modeled as a cost of transferring goods from one country to the other. We also find that the gain is nonmonotonic with respect to investors' risk aversion and the aggregate volatility of output growth. The policy implication to be drawn is that financial market integration is a worthwhile goal to pursue even when full goods mobility has not been achieved. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Dumas, Bernard & Uppal, Raman, 2001. "Global Diversification, Growth, and Welfare with Imperfectly Integrated Markets for Goods," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 277-305.
    • Handle: RePEc:oup:rfinst:v:14:y:2001:i:1:p:277-305
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    References listed on IDEAS

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    1. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
    2. Larry Selden, 1979. "An OCE Analysis of the Effect of Uncertainty on Saving under Risk Preference Independence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(1), pages 73-82.
    3. Wheatley, Simon, 1988. "Some tests of international equity integration," Journal of Financial Economics, Elsevier, vol. 21(2), pages 177-212, September.
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    Cited by:

    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    2. Doireann Fitzgerald, 2012. "Trade Costs, Asset Market Frictions, and Risk Sharing," American Economic Review, American Economic Association, vol. 102(6), pages 2700-2733, October.
    3. Buss, Adrian & Uppal, Raman & Vilkov, Grigory, 2015. "Asset prices in general equilibrium with recursive utility and illiquidity induced by transactions costs," SAFE Working Paper Series 41, Leibniz Institute for Financial Research SAFE, revised 2015.
    4. Georg H. Strasser, 2010. "The Efficiency of the Global Markets for Final Goods and Productive Capabilities," Boston College Working Papers in Economics 766, Boston College Department of Economics, revised 31 Jan 2012.
    5. Angel Serrat, 2001. "A Dynamic Equilibrium Model of International Portfolio Holdings," Econometrica, Econometric Society, vol. 69(6), pages 1467-1489, November.
    6. Egil Matsen, 2005. "International diversification, growth, and welfare with non-traded income risk and incomplete markets," Applied Financial Economics, Taylor & Francis Journals, vol. 15(15), pages 1063-1072.
    7. Matsen, Egil, 2003. "Habit persistence and welfare gains from international asset trade," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 239-260, April.
    8. Gautam Goswami & Milind Shrikhande & Liuren Wu, 2002. "A Dynamic Equilibrium Model of Real Exchange Rates with General Transaction Costs," Finance 0207016, University Library of Munich, Germany.
    9. Soumare, Issouf, 2007. "International capital markets and redundant securities," Journal of Economic Dynamics and Control, Elsevier, vol. 31(3), pages 1037-1050, March.
    10. Basak, Suleyman & Croitoru, Benjamin, 2007. "International good market segmentation and financial innovation," Journal of International Economics, Elsevier, vol. 71(2), pages 267-293, April.
    11. Chambet, Anthony & Gibson, Rajna, 2008. "Financial integration, economic instability and trade structure in emerging markets," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 654-675, June.
    12. Basak, Suleyman & Croitoru, Benjamin, 2003. "International Good Market Segmentation and Financial Market Structure," CEPR Discussion Papers 4060, C.E.P.R. Discussion Papers.
    13. Bhamra, Harjoat S. & Uppal, Raman, 2006. "The role of risk aversion and intertemporal substitution in dynamic consumption-portfolio choice with recursive utility," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 967-991, June.
    14. Timothy K. Chue, 2004. "The Spirit of Capitalism and International Risk Sharing," Econometric Society 2004 Far Eastern Meetings 589, Econometric Society.
    15. Asiye Aydilek & Harun Aydilek, 2020. "An optimization model of retiree decisions under recursive utility with housing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 258-277, April.

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    More about this item

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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