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The impact of financial market imperfections on trade and capital flows

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  • Spiros Bougheas
  • Rod Falvey

    (University of Nottingham)

Abstract

We introduce financial frictions in a two sector model of international trade with heterogeneous agents. The level of specialization in the economy (economic development) depends on the quality of financial institutions. Underdeveloped financial markets prohibit an economy to specialize in sectors where finance is important. Capital flows and international trade are complements when countries differ in the degree of development of their financial sectors. Capital flows to countries with more robust financial institutions which in turn allow their economies to develop sectors that are financially dependent.

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Bibliographic Info

Article provided by Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia. in its journal EconoQuantum, Revista de Economia y Negocios.

Volume (Year): 6 (2009)
Issue (Month): 1 (Julio - Diciembre)
Pages: 91-110

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Handle: RePEc:qua:journl:v:6:y:2009:i:1:p:91-110

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Keywords: trade flows; capital flows; financial frictions.;

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  1. Beck, T.H.L., 2003. "Financial dependence and international trade," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125509, Tilburg University.
  2. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, 08.
  3. Yongfu Huang & Jonathan Temple, 2005. "Does external trade promote financial development?," Bristol Economics Discussion Papers 05/575, Department of Economics, University of Bristol, UK.
  4. Svaleryd, Helena & Vlachos, Jonas, 2005. "Financial markets, the pattern of industrial specialization and comparative advantage: Evidence from OECD countries," European Economic Review, Elsevier, vol. 49(1), pages 113-144, January.
  5. Branko Milanovic, 2005. "Global Income Inequality: What It Is And Why It Matters?," HEW 0512001, EconWPA.
  6. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
  7. Kiminori Matsuyama, 2004. "Credit Market Imperfections and Patterns of International Trade and Capital Flows," Discussion Papers 1389, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Bougheas, Spiros & Riezman, Raymond, 2007. "Trade and the distribution of human capital," Journal of International Economics, Elsevier, vol. 73(2), pages 421-433, November.
  9. Kenneth Kletzer and Pranab Bardhan., 1986. "Credit Markets and Patterns of International Trade," Economics Working Papers 8612, University of California at Berkeley.
  10. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  11. Jiandong Ju & Shang-Jin Wei, 2008. "When Is Quality of Financial System a Source of Comparative Advantage?," NBER Working Papers 13984, National Bureau of Economic Research, Inc.
  12. Peter Egger & Christian Keuschnigg, 2009. "Corporate Finance and Comparative Advantage," University of St. Gallen Department of Economics working paper series 2009 2009-04, Department of Economics, University of St. Gallen.
  13. José Wynne, 2005. "Wealth as a Determinant of Comparative Advantage," American Economic Review, American Economic Association, vol. 95(1), pages 226-254, March.
  14. Carl Davidson & Steven Matusz, 2005. "Trade Liberalization and Compensation," International Trade 0503008, EconWPA.
  15. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
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