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Global diversification, growth and welfare with imperfectly integrated markets for goods

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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. We find that the welfare gain of financial market openess is non-monotonic with respect to investors' risk aversion and the aggregate volatility of output growth. Our main result is that the welfare gain from integration is not greatly reduced by the presence of goods markert imperfections, modeled as a cost of transferring goods from one country to the other. The policy implication to be drawn is that financial market integration is a worhtwile goal to pursue even when full goods mobility has not been achieved.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp1999/99-63.pdf

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Copyright INSEAD. All rights reserved