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On the hidden links between financial and trade opening

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  • Aizenman, Joshua

Abstract

Developing countries characterized by high costs of tax collection and enforcement opt to use financial repression as an implicit tax on savings, providing the impetus for capital flight. A mechanism facilitating illicit capital movements is trade misinvoicing, where the effectiveness of capital controls would increase with the resources spent on monitoring and enforcement per one dollar of international trade. Under these circumstances, greater trade openness increases the effective cost of enforcing financial repression, thereby reducing the usefulness of financial repression as an implicit tax. This in turn implies that financial reforms tend to be the by-product of greater trade integration.

Suggested Citation

  • Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
  • Handle: RePEc:eee:jimfin:v:27:y:2008:i:3:p:372-386
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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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