Long-run effects of capital market integration using Solow's model
Résumé
The purpose of this paper is to synthesize the thre
e results in the existing literature (and to add a
fourth result) in a
single unified framework and thus to identify the c
onditions under which the capital-exporting and cap
ital-importing
countries gain from international financial integra
tion. We show that the capital-exporting country wi
ns if it saves a
constant fraction of its profits, and that capital-
importing country wins if it saves a constant fract
ion of its wages. In
Solow's model for the integration of the capital ma
rket to be profitable, it is necessary for savings
to be proportional to
income, which increases through the integration of
the capital market: profit of the lender, and wages
of the borrower.
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