"Does finance follow the real economy, or the other way around? This paper unites the two competing schools of thought in a general equilibrium framework. Our key result is that there are threshold effects defined by a set of deep institutional parameters (cost of financial intermediation,...

This paper proposes a simple model to study the relationship between domestic institutions - financial system, corporate governance, and property rights protection - and patterns of international capital flows. It studies conditions under which financial globalization can be a substitute for...