Summary
Countries differ on the extent to which their financial system relies on banks or on the financial market. These variations are well documented by Allen and Gale (2001) who highlight the differences between on the one hand the USA and Britain with their well-developed capital markets and on the other hand Japan, Germany and France where traditionally banks have provided the main financial support for firms.
In this Nottingham School of Economics working paper Spiros Bougheas, Fabrice Defever and co-authors offer a model featuring a possible two-way relationship between countries' financial system architecture and their comparative advantage. Countries specialising in bank dependent sectors favour the development of the banking sector. Simultaneously, countries with more efficient capital markets develop comparative advantage in sectors with strong dependence on market finance. To empirically investigate our model's predictions, the authors construct a measure of sector bank dependence and establish a strong relationship between countries' comparative advantage and their financial system architecture. On the one hand, the evidence suggests that the evolution of financial market architecture exerts a bias on export patterns. In particular, changes that favor the equity market relative to the banking sector will have a positive impact on those sectors of the economy that are relatively more dependent on direct finance. On the other hand, the empirical work also suggests that sectors that have a technological advantage also have a significant impact on the evolution of financial market architecture.
GEP Discussion Paper 16/09, Financial System Architecture and the Patterns of International Trade by Emmanuel Amissah, Spiros Bougheas, Fabrice Defever and Rod Falvey
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Authors
Emmanuel Amissah, Spiros Bougheas, Fabrice Defever and Rod Falvey
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Posted on Friday 24th June 2016