Trade and Capital Flows: A Financial Frictions Perspective

Citation:

Antràs, Pol, and Ricardo Caballero. 2009. “Trade and Capital Flows: A Financial Frictions Perspective.” Journal of Political Economy 117 (4): 701-44.
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Abstract:

The classical Heckscher-Ohlin-Mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to flow to capital-scarce countries. In this paper we show that in a world with heterogeneous financial development, a very different conclusion emerges. In particular, in less financially developed economies (South), trade and capital mobility are complements in the sense that trade integration increases the return to capital and thus the incentives for capital to flow to South. This interaction implies that deepening trade integration in South raises net capital inflows (or reduces net capital outflows). It also implies that, at the global level, protectionism may backfire if the goal is to rebalance capital flows.

Notes:

Published versions have been posted with the written permission of the journals where they appeared. Standard copyright rules apply. Please download and print for personal use only. Richard Caballero's website

DOI:10.1086/605583

Last updated on 03/22/2013