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The impact of financial market imperfections on trade and capital flows

  • Spiros Bougheas
  • Rod Falvey

    (University of Nottingham)

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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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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  1. Beck, Thorsten, 2002. "Financial development and international trade: Is there a link?," Journal of International Economics, Elsevier, vol. 57(1), pages 107-131, June.
  2. Kenneth Kletzer and Pranab Bardhan., 1986. "Credit Markets and Patterns of International Trade," Economics Working Papers 8612, University of California at Berkeley.
  3. Spiros Bougheas & Raymond Riezman, 2013. "Trade and the distribution of human capital," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 20, pages 395-407 World Scientific Publishing Co. Pte. Ltd..
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  8. Branko Milanovic, 2006. "Global Income Inequality: What It Is And Why It Matters?," Working Papers 26, United Nations, Department of Economics and Social Affairs.
  9. Yongfu Huang & Jonathan Temple, 2005. "Does external trade promote financial development?," Bristol Economics Discussion Papers 05/575, Department of Economics, University of Bristol, UK.
  10. 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.
  11. Caballero, Ricardo J. & Antras, Pol, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," Scholarly Articles 3264875, Harvard University Department of Economics.
  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. 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.
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