Does trade cause capital to flow?

Description

"Are trade and capital mobility complements or substitutes? The standard Heckscher-Ohlin theory postulates that they are substitutes since trade integration invalidates the need for capital to flow to capital-scarce countries. On the other hand, in a recent paper, Antras and Caballero (2009) show that in a world with varying degrees of financial development, trade and capital mobility become complements since trade integration increases the return to capital in less financially developed economies. In our paper, we provide evidence for this complementarity between trade and financial flows of Germany, France, the U.K. - as source countries, and the Ottoman Empire - as a host country, over 1859-1913. Given the provisionistic view of the Empire during this period, only a surplus agricultural production was exported after the Ottoman army was fed. This allowed us to match the content of the Ottoman trade with the agricultural production and instrument trade with rainfalls to establish causality. We find that trade causes capital to flow from the North - the U.K., France and Germany, to the South - the Ottoman Empire. This result holds after accounting for the negative effect of the Ottoman default on financial flows. The complementarity between trade and capital flows gets weaker after the default only when the Ottoman Empire was made subject to a sanction in the form of financial control of the sovereign"--National Bureau of Economic Research web site.

Subjects

Series Statement

• NBER working paper series -- working paper 16034
• Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16034.

Links

• External source