Trade and Capital Flows: A Financial Frictions Perspective
Author(s)Antras, Pol; Caballero, Ricardo J.
MetadataShow full item record
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.
DepartmentMassachusetts Institute of Technology. Department of Economics
Journal of Political Economy
University of Chicago Press
Antràs, Pol, and Ricardo J. Caballero. “Trade and Capital Flows: A Financial Frictions Perspective.” The Journal of Political Economy 117.4 (2009): 701-744.© 2009 University of Chicago Press.
Final published version