This paper studies an economy in which financial integration increases world welfare in the presence of international policy coordination but decreases world welfare in its absence. This happens because financial integration enhances the impact of domestic government policies on foreigners, which increases welfare losses from noncooperative policymaking. The policy message is that financial integration can be successful if and only if governments agree to coordinate their macroeconomic policies.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics