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Abstract

This paper investigates the effects of subnational regionalization on a country’s terms of trade, trade patterns, and its welfare. We show that a countrycan gain from dividing itself into two regions with different factor ratios. Making a region in a countryto have a comparative advantage different from the country as a whole cangenerate a welfare improving terms-of-trade effect. We also show that subnational regionalization can reduce thevolume of trade and or even reverse countries’ trade patterns. This explains theparadox between trade patterns predicted by the standard Heckscher-Ohlin model and those found empirically.

Abstract

This paper studies the different tradeoffs between growth and volatility by both sides of capital flows on the basis of their different considerations of financial risks and levels of financial development. Since growth and volatility are negatively correlated, volatility must be kept low to derive high growth from capital flows when integrating into global markets. The reason why one side´s push for capital market opening encounters the other side´s reluctance is that the former may likely benefit from openness while the latter is unsure abouth the gains from financial liberalization due to its financial market imperfections. This conflict of interest is resolved as a bargaining equilibrium by making each side´s optimal tradeoff internationally compatible. Bargaining between the two sides with differeing valuations of capital flows leads to information revelation through strategic delays in financial liberalization which explains the many stylized puzzles such as the Feldstein-Horioka puzzle.