Global diversification, growth, and welfare with imperfectly integrated markets for goods

In this article we examine the effect of the imperfect mobilityof goods on international risk sharing and, through that, onthe investment in risky projects, welfare, and growth. Our mainresult is that the welfare gain from integration of financialmarkets is not greatly reduced by the presence of goods marketimperfections, modeled as a cost of transferring goods fromone country to the other. We also find that the gain is nonmonotonicwith respect to investors' risk aversion and the aggregate volatilityof output growth. The policy implication to be drawn is thatfinancial market integration is a worthwhile goal to pursueeven when full goods mobility has not been achieved.