Purpose – This paper inquires into the root causes of global imbalances from an international trade perspective. The purpose of the paper is to establish a conceptual framework that links financial market governance, international trade and financial market integration, and to derive implications for the global financial crisis. Design/methodology/approach – In order to analyze global imbalances, the paper draws on a theoretical Heckscher-Ohlin-Samuelson international trade model, in which it compares two open economies, solely differing in their financial market governance structures. Building on these findings, the paper extends the analysis to the role of financial market frictions in propagating global imbalances into excessive lending in high-income economies. Findings – To that extent, it argues that global imbalances are due to impasses in international production. This paper argues that countries seeking to suppress real appreciation have engaged in financial repression, which has, via financial globalization, translated into excessive expansion of financial service sectors in flexible market economies. Research limitations/implications – In order to derive a tractable framework, the abstract from inter-temporal aspects and from an in-depth analysis of financial modelling issues. Owing to the static nature of the set-up, the analytic link between global imbalances and the global financial crisis is intuitive. Practical implications – Given that differences in national financial market governance influence the direction of international capital and trade flows, it argues for more international policy coordination in preventing future crisis. Originality/value – The unique feature of the contribution is that it links financial market governance and international trade to international financial market integration in a tractable theoretical framework.
