We show that, in a two-country model where the two economies differ in their level of financial market development and initial capital endowment, financial integration has sizeable transitory as well as permanent effects. We confirm that, consistent with the Lucas paradox, financial integration...

The textbook neoclassical growth model predicts that countries with lower capital stock benefit from capital account liberalization since integration increases the speed of convergence through the equalization of returns on capital. In the present analysis we show that, in the medium term,...