Trade and capital flows
Subtitle: a financial frictions perspective
By: Pol Antrás, Ricardo J. Caballero.
Contributors: Caballero, Ricardo J.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13241.; Working paper series (National Bureau of Economic Research) -- working paper no. 13241.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 41
Subjects: International trade; Free trade; Protectionism; Commercial policy; Capital movements -- Econometric models
Description: 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, the classic conclusion does not hold. In particular, in less financially developed economies (South), trade and capital mobility are complements. Within a dynamic framework, the complementarity carries over to (financial) capital flows. 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, when these are already heading from South to North. Our perspective also has implications for the effects of trade integration on factor prices. In contrast to the Heckscher-Ohlin model, trade liberalization always decreases the wage-rental in South: an anti-Stolper-Samuelson result.
Notes: "July 2007"

Includes bibliographical references (p. 33-34).

Also available in PDF from the NBER world wide web site (www.nber.org).