Trade and Capital Flows: Substitutes or Complements? An Empirical Investigation

Ansgar Belke and Clemens Domnick

No 12564, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines the linkages between the trade of goods and financial assets. Do both flows behave as complements (implying a positive correlation) or as substitutes (negative correlation)? Although a classic topic in international macroeconomics, the empirical evidence has remained relatively scarce so far, in particular for the Euro area where trade and financial imbalance played a prominent role in the build-up of the European sovereign debt crisis. Consequentially, we use a novel dataset, providing estimates for financial flows and its four main categories for 42 countries and covering the period from 2002-2012, to test the so-called trade-finance nexus. Since theoretical models stress that both flows might be influencing each other simultaneously, we introduce a novel time-varying instrumental variable based on capital control restrictions to estimate a causal effect. The results of the gravity regressions support theories that underline the complementarity between exports and capital flows. When testing the trade-finance nexus for different types of capital flows, the estimated coefficient is most pronounced for foreign direct investment, in line with theories stressing informational frictions. Robustness checks in the form of different estimation methods, alternative proxies for capital flows and sample splits confirm the positive relationship. Interestingly, the trade-finance nexus does not differ among countries belonging to the EMU, the European Union or among core and peripheral Euro area countries.

Keywords: Heckscher-Ohlin paradigm; economic integration; interaction between trade integration and capital mobility; capital flows; trade (search for similar items in EconPapers)
JEL-codes: F14 F15 F21 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2019-08
New Economics Papers: this item is included in nep-eec, nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published in: Review of International Economics, 2021, 29 (3), 573 - 589

Downloads: (external link)
https://docs.iza.org/dp12564.pdf (application/pdf)

Related works:
Journal Article: Trade and capital flows: Substitutes or complements? An empirical investigation (2021)
Working Paper: Trade and capital flows: Substitutes or complements? An empirical investigation (2019)
Working Paper: Trade and capital flows: Substitutes or complements? An empirical investigation (2018)
Working Paper: Trade and capital flows - substitutes or complements? An empirical investigation (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp12564

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().