The Effects Of Financial Development On Global Trade Imbalance

Under the background of economic globalization, the problem of trade imbalances is becoming more and more conspicuous. As three aspects of globalization, which are fields of international division of labor and production, international trade and flow of commodity, financial development and flow of capital, are increasingly obvious, more and more scholars turn their views to financial development, in order to find a more effective way to solve the trade imbalance. In this paper, the author hopes to analyze the mechanism of financial development on trade imbalances, combined with the mainstream trade theories. We also want to build an intertemporal trade model with the liquidity constraints, to find a further evidence of the relationship between financial development and trade imbalances.In this paper, firstly, from the perspective of financial development’s functional view, based on the mainstream trade theory, we found that financial development can influence international trade by the way of the capital comparative advantage, endogenous technological progress, economies of scale, the barrel theory and risk diversification. Secondly, underlying Obstfeld’s classical intertemporal theory, we construct an intertemporal consumption model, combing with the factors of financial development, on the perspective of the current account. This model can explain the mathematical relationship between financial development and international trade from the theoretical point of view, further enrich the mechanism. Finally, we introduce the concept of financial development based on theory of financial development, and then summarize the main indicators that measure the level of financial development from two aspects——financial intermediaries and securities market. We also compare the differences in financial development from the size of private credit, the size of stock market and the efficiency of stock market in these countries with different income level, as well as different regional.In the empirical part, this paper uses a dynamic panel GMM estimator to exam the effect of the size and efficient indicators of financial development on trade imbalances. Our cross-country analysis, encompassing a sample of91countries’ economic and financial data for the period of1990though2011, yields that empirically both credit to the private sector and stock market capitalization appear to be negative to trade imbalances. However, the stock market turnover ratios’ coefficients turn out to be significantly positive. To solve the problem of Global trade imbalances, we must fundamentally narrow the difference of financial development in different countries, and develop emerging market countries’ domestic financial market, finally change USA’ leading and dominant position in global financial system, build a diversified international financial system.