Financial globalization and economic growth

Abstract

We analyze the e¤ects of capital mobility on the speed of convergence and welfare. Using a two-sector endogenous growth model, the speed of convergence is determined primarily by the gap in rates of return between physical and human capital. In a closed economy, where we consider a typi- cal situation of having relatively less physical capital than in a steady state, the return on physical capital will be signi cantly large, while the return on human capital will be relatively small. Thus, this gap in rates of return is considerably large when the economy is not at its steady state. In an open economy, where human capital is non tradable, the gap in rates of return is small, as it is the gap between the international interest rate (which is less than the closed economy return on physical capital during transition) and the return on human capital. Hence, convergence in open economies will be relatively slow, and convergence in closed economies will be relatively fast, and therefore there is little welfare gains to nancial liberalization. More- over, the result on the speeds of convergence for closed and open economies reverses the conclusion given by the one-sector neoclassical growth model for the same experiment.