DP5846 International Trade and Finance under the Two Hegemons: Complementarities in the United Kingdom (1870-1913) and the United States (1920-30)

Author(s): Alan M. Taylor, Janine Wilson
Publication Date: October 2006
Keyword(s): complementarities, international investment, international trade
JEL(s): F10, F30, F40, N10, N20, N70
Programme Areas: International Macroeconomics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5846

Do international trade and finance flow together? In theory, trade and finance can be substitutes or complements, so the matter must be resolved empirically. We study trade and financial flows from the United Kingdom from 1870 to 1913 and the United States in the interwar years. Trade and finance are robustly correlated, even after allowing for simultaneity. Evidence from the British Empire casts doubt on the idea that trade is a punishment device in the event of default.