Financial system architecture and the patterns of international trade

Countries differ in the extent to which their financial systems rely on banks or on financial markets. We offer a model featuring a complex relationship between countries' financial system architecture and their comparative advantage. Countries with capital markets that are relatively more efficient than their banking systems gain comparative advantage in sec-tors with strong dependence on market finance. Moreover, countries specializing in sectors that depend on market finance develop their capital markets more than their banking sys-tems. To empirically investigate these links, we construct a measure of sector bank depen-dence and establish a bi-directional relationship between countries' comparative advantage and their financial systems architecture. (c) 2021 Elsevier B.V. All rights reserved.