- Trade and Capital Flows: A Financial Frictions Perspective
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- by Antràs, Pol; Caballero, Ricardo J.
- 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 ow to
capital-scarce countries. In this paper we show that in a world with heterogeneous
development, the classic conclusion does not hold. In particular, in less
economies (South), trade and capital mobility are complements. Within a dynamic framework,
the complementarity carries over to (
nancial) capital ows. This interaction implies that
deepening trade integration in South raises net capital inows (or reduces net capital outows).
It also implies that, at the global level, protectionism may back
re if the goal is to rebalance
capital ows, when these are already heading from South to North. Our perspective also has
implications for the e¤ects 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-
- Publication Type: WCFIA Working Paper
- Published Date: November 2, 2007
- Field of Interest: International Economics
- Antràs, Pol, and Ricardo Caballero. "Trade and Capital Flows: A Financial Frictions Perspective." Working Paper 2008-0006, Weatherhead Center for International Affairs, Harvard University, November 2007.