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Domestic Responses to Free Trade and Free Finance in OECD Countries

Published online by Cambridge University Press:  20 January 2017

Daniel Verdier
Daniel Verdier*
Affiliation:
European University Institute
*
Department of Social and Political Sciences, European University Institute, via dei Roccettini 9, 1-50016 San Domenico di Fiesole (FI), Italy. Tel.: + 39 055-4685-244; Fax: + 39 055-4685-201; E-mail: [email protected]
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Abstract

For the first time in modern history, free trade coexists with free finance. Free trade and free finance (defined as the deregulation and internationalization of banking and finance) are not mutually reinforcing, but cause a mismatch between the demand and supply of financial instruments. Investors want more marketable instruments whereas entrepreneurs want more transaction-specific instruments. 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. Free finance is most successful in centralized countries, where resistance to free finance is least strongly felt. This hypothesis is systematically tested on a sample of OECD countries.

Type
Research Article
Information
Business and Politics , Volume 1 , Issue 3 , November 1999 , pp. 279 - 316
Copyright
Copyright © V.K. Aggarwal 1999 and published under exclusive license to Cambridge University Press 

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