Domestic Responses to Free Trade and Free Finance in OECD Countries 98

Abstract:  For the first time in modern history, free trade co-exists with free finance. Free trade and free finance are not mutually reinforcing, but cause a mismatch between the demand and supply of risk capital. This mismatch potentially hurts small firms and local interests most. What can they do about it? It depends on state institutions: the more centralized the state, the fewer opportunities available to potential losers to curb free finance. As a result, financial globalization is most successful in centralized countries, where resistance to centralization is least strongly felt. This hypothesis is systematically tested on a sample of OECD countries. Domestic Responses to Free Trade and Free Finance in OECD Countries * This is not the first time that national financial markets are becoming more global. They reached a similar, if not more advanced, state of mutual dependence during the classic era of the Gold Standard. 1 What is unique about the last three decades of the Twentieth Ce...