This paper analyzes theoretically how trade integration affects financial capital flows in a world with heterogeneous financial development. In the presence of financial frictions and sector-specific minimum investment requirements, the static gains from trade trigger the cross-sector investment...

We analyze the implications of financial openness to macroeconomic volatility in a small open economy. Major macroeconomic aggregates show non-monotonic volatility patterns with respect to the degree of financial openness in the model without domestic financial frictions. The introduction of...

The unprecedented rise and persistence of large-scale budget deficits in many developed and developing nations during the past three decades has caused great concern. The widespread presence of such deficits has proved difficult to explain. Their emergence in otherwise diverse nations defies...