In this article we examine the effect of the imperfect mobility of goods on international risk sharing and, through that, on the investment in risky projects, welfare, and growth. Our main result is that the welfare gain from integration of financial markets is not greatly reduced by the presence of goods market imperfections, modeled as a cost of transferring goods from one country to the other. We also find that the gain is nonmonotonic with respect to investors' risk aversion and the

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... e volatility of output growth. The policy implication to be drawn is that financial market integration is a worthwhile goal to pursue even when full goods mobility has not been achieved. The benefits, along with the impact on growth, of free trade in goods are frequently contrasted with those of the free movement of capital around the world. While, on the one hand, the benefits of freer trade, provided competition is pure and perfect, are viewed as substantial and are opposed only by the need of some governments to raise revenues in the form of tariffs, unfettered capital flows on the other are regarded with more suspicion. The reasons for this suspicion may be valid ones (deviations from rational expectations, herding behavior, bubbles, crises, etc.), but they ought to be brought into play only after the impact of free capital flows under ideal conditions is well understood. It is undeniable, however, that the benefits of free capital flows under ideal conditions, and their merits relative to free trade, have not been the subject of as much research as free trade itself. What seems to be needed is a study that would help decide to what extent, and in what sense, the degree of openness of goods markets and the degree We are grateful to two anonymous referees and to . We would also like to acknowledge suggestions from seminar participants at