Macroeconomic rebalancing and financial integration in East Asia: Overview

This chapter describes the recently developed methods to show which groups of countries in the East Asian region would benefit most from closer financial integration. It investigates to assess the gains from financial integration the welfare gain from reducing the volatility of real Gross Domestic Product (GDP), since financial integration opens the possibility to smooth consumption in the face of output uncertainty. Research methodology is initial step to calculate the variance of output growth rates for each country under autarky and within different risk-sharing pools and to evaluate the welfare implications of the different pools. The standard theory of risk-sharing between countries asserts that, with complete markets, each country within the group consumes a fixed amount of aggregate output, but it does not give any information on the appropriate measure of the welfare gain associated with risk-sharing. The discussion of the measurement of countries risk-sharing began when Lucas estimated the welfare cost of consumption uncertainty in the US economy.