Endogenous Financial and Trade Openness: Political Economy Considerations
AbstractThis paper studies the endogenous determination of financial and trade openness. First, we outline channels leading to two-way feedbacks between the different modes of openness; next, we identify these feedbacks empirically. We find that one standard deviation increase in commercial openness is associated with a 9.5 percent increase in de-facto financial openness (% of GDP), controlling for political economy and macroeconomic factors. Similarly, increase in de-facto financial openness has powerful effects on future trade openness. While de-jure restrictions on capital mobility do not impact de-facto financial openness, de-jure restrictions on the current account have large adverse effect on commercial openness, suggesting that it is much easier to overcome restrictions on capital account convertibility than restrictions on commercial trade. Having established (Granger) causality, we investigate the relative magnitudes of these directions of causality using the decomposition test developed in Geweke (1982). We find that almost all of the linear feedback between trade and financial openness can be accounted for by G-causality from financial openness to trade openness (53%) and from trade to financial openness (34%). The residual is due to simultaneous correlation between the two measures.
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Bibliographic InfoPaper provided by East-West Center, Economics Study Area in its series Economics Study Area Working Papers with number 72.
Length: 41 pages
Date of creation: Apr 2004
Date of revision: Sep 2004
Find related papers by JEL classification:
- F15 - International Economics - - Trade - - - Economic Integration
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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