NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

When Is Quality of Financial System a Source of Comparative Advantage?

Jiandong Ju, Shang-Jin Wei

NBER Working Paper No. 13984
Issued in May 2008
NBER Program(s):   CF   IFM   ITI

Does finance follow the real economy, or the other way around? This paper unites the two competing schools of thought in a general equilibrium framework. Our key result is that there are threshold effects defined by a set of deep institutional parameters (cost of financial intermediation, quality of corporate governance, and level of property rights protection) which can be used to separate economies of high-quality institutions from those of low-quality institutions. On one hand, for economies with high-quality institutions, the view that finance follows the real economy is essentially correct. Equilibrium output and prices are determined by factor endowment. Further improvement in the institutions does not affect patterns of output. On the other hand, for economies with low-quality institutions, the view that finance is a key driver of the real economy is essentially correct. Not only is finance a source of comparative advantage, but an increase in capital endowment has no effect on outputs and prices. Our model extends a standard one-sector, partial equilibrium model of corporate finance to a multi-sector, general equilibrium analysis. Surprisingly, but consistent with data, we show that the size of financial markets (relative to GDP) does not change monotonically with either the quality of institutions or with the factor endowment. Free trade may reduce the aggregate income of an economy with low-quality institutions. Financial capital tends to flow from economies with low-quality institutions to those with high-quality institutions.

download in pdf format
   (420 K)

email paper

This paper is available as PDF (420 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13984

Published: Ju, Jiandong & Wei, Shang-Jin, 2011. "When is quality of financial system a source of comparative advantage?," Journal of International Economics, Elsevier, vol. 84(2), pages 178-187, July. citation courtesy of

Users who downloaded this paper also downloaded these:
Ju and Wei w13148 Domestic Institutions and the Bypass Effect of Financial Globalization
Tong and Wei w15207 The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis
Wei and Zhang w15093 The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China
Ahn, Khandelwal, and Wei w15706 The Role of Intermediaries in Facilitating Trade
Koopman, Wang, and Wei w14109 How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us