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Anne Epaulard is with the University of Paris Dauphine, and Aude Pommeret is with the University of Lausanne. The authors started working on this paper while Anne Epaulard was a senior economist in the Asian Division of the IMF Institute. They benefited from comments from Philippe Bacchetta, Jean-Pierre Danthine, Andrew Feltenstein, Olivier Jeanne, Françoise Le Gall, Pascal Saint-Amour, and participants at the IMF Institute seminar, and the 2003 SED conference in Paris.
It can be wages paid to resident as well.
We do not model the behavior of the foreign investor but make sure he is indifferent between investing in riskless bonds in his country and risky FDI in the developing country. The assumption that his participation to the economy is constant over time implies that the stock of FDI he owns grows at the developing economy growth rate. In order to model the behavior of the foreign investor one would have to consider a multicountry model. This is not done in this paper.
The definition we use is the compensating variation.
Note that in our endogenous growth model it is impossible to define what would be full financial integration. Therefore, we cannot derive a measure of the effect of financial integration that would directly compare with that of Gourinchas and Jeanne.