Capital shares and the intergenerational consequences of international financial integration

Abstract

We revisit the welfare consequences of international financial integration (IFI) in a two-country OLG model where countries differ in the capital share of national income. We establish four main results: (i) the country with the highest capital share is the net recipient of capital flows as its output per effective units of labour is lower in autarky (i.e. developing economy), consistently with empirical evidence; (ii) on aggregate, IFI brings a 10% increase in consumption for the developing economy; (iii) IFI has uneven effects across generations: the first generation in the developing (developed) economy incurs a welfare loss (gain), while the remaining generations gain (lose) from IFI; (iv) labour (capital) should be taxed in the developing (developed) country to ensure that IFI is Pareto superior to financial autarky.