Long-run effects of capital market integration using Solow's model

Abstract : 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.