Endogenous financial and trade openness

Joshua Aizenman, Ilan Noy

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

Abstract

The authors study the endogenous determination of financial and trade openness. They construct a theoretical framework leading to two-way feedbacks between financial and trade openness and identify these feedbacks empirically. They find that one standard deviation increase in commercial openness is associated with a 9.5% increase in de facto financial openness (% of GDP). Similarly, an increase in de facto financial openness has powerful effects on future trade openness. De jure restrictions on capital mobility have only a weak impact on de facto financial openness, while de jure restrictions on the current account have a large adverse effect on commercial openness. The authors investigate the relative magnitudes of these directions of causality using Geweke's (1982) decomposition methodology. They conclude that in an era of rapidly growing trade integration, countries cannot choose financial openness independently of their degree of openness to trade. Dealing with greater exposure to turbulence by imposing restrictions on financial flows is likely to be ineffectual.

Original languageEnglish
Pages (from-to)175-189
Number of pages15
JournalReview of Development Economics
Volume13
Issue number2
DOIs
StatePublished - 6 May 2009
Externally publishedYes

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