The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development

36 Pages Posted: 1 Feb 2011

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Rod Falvey

Bond University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2011

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, economic development

JEL Classification: F21, G15

Suggested Citation

Bougheas, Spiros and Falvey, Rod, The Impact of Financial Market Frictions on Trade Flows, Capital Flows and Economic Development (January 31, 2011). CESifo Working Paper Series No. 3321. Available at SSRN: https://ssrn.com/abstract=1752134

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

Rod Falvey

Bond University - Department of Economics ( email )

Bond University - Department of Economics
Gold Coast, Queensland 4229
Australia

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