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The High Cross-Country Correlations of Prices and Interest Rates

  • Espen Henriksen
  • Finn E. Kydland
  • Roman Sustek

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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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 11/01.

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Handle: RePEc:not:notcfc:11/01
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