Trade openness and connectedness of national productions: Do financial openness, economic specialization, and the size of the country matter?

Recent studies have used data from a few developed countries to show that countries with trade surpluses tend to be net recipients of connectedness shocks. Unlike those studies that have focused on the effects of the trade balance on net connectedness, our paper focuses on the effects of trade openness on directional and bilateral connectedness. Moreover, we use a high-dimensional approach to measure our connectedness indicators and a fixed-effect panel model for regression. We also analyze the variables that amplify the effect of trade openness. The data used in this study come from 27 OECD countries and China over the period from 1991M1 to 2017M12. We show that trade openness and trade integration increase connectedness “from other countries” and bilateral connectedness “from another country”, respectively. Financial integration and differences in economic specialization dampen the effects of trade integration on bilateral connectedness “from another country”, while periods of recessions amplify them.