Real-Financial Linkages Among Open Economies

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This paper integrates the contributions to a forthcoming volume of the same title by the authors. The volume analyzes and empirically examines linkages between the real and financial variables that themselves link open economies-- "linkage" thus has a double meaning. Two types of linkages are discussed. Structural linkages describe differences across economies and among sectors in market structure (competitive/oligopolistic), productivity growth, and openness to trade. Inter-temporal linkages describe differences across economies and over time or circumstance in saving preferences and capital formation, government budgets, portfolio shares of "inside" and "outside" assets, and openness to mobile financial flows. Structural linkages are important chiefly for explaining sustained divergences in national competitiveness as measured by purchasing-power-parity norms. Inter-temporal linkages also account for them, as well as for sustained divergences in current and capital-account positions, geographical growth rates, and national incomes of residents.