Specialization patterns in a dynamic Heckscher-Ohlin (HO) model with endogenous capital accumulation are examined in the presence of free international lending and borrowing. Without free international lending and borrowing it is known that, whereas the less (time-) patient country decumulates real capital, the more patient country accumulates real capital and eventually specializes in a capital-intensive industry. However, free trade of international financial assets causes a dramatic change in long-run specialization patterns. In this case the less patient country may well specialize in the capital-intensive industry and the more patient country in the labor-intensive industry.
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number
574.
Find related papers by JEL classification: F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy