The impact of financial market imperfections on trade and capital flows

Spiros Bougheas and Rodney Falvey

EconoQuantum, Revista de Economia y Finanzas, 2009, vol. 6, issue 1, 91-110

Abstract: 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.

Keywords: trade flows; capital flows; financial frictions. (search for similar items in EconPapers)
JEL-codes: F21 G15 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:qua:journl:v:6:y:2009:i:1:p:91-110

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