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Does financial sector development affect the growth gains from trade openness?

Author

Listed:
  • N.R. Ramírez-Rondán

    (Universidad del Pacífico)

  • Marco E. Terrones

    (Universidad del Pacífico)

  • Andrea Vilchez

    (Universidad del Pacífico)

Abstract

A sizeable literature suggests that financial sector development could be an important enabler of the growth benefits of trade openness. We provide a comprehensive analysis of how financial development can affect the relationship between trade openness and growth using a dynamic panel threshold model and an extensive dataset for a large sample of countries for the 1970-2015 period. We find that there is a financial development threshold in which trade openness has a positive and significant effect on economic growth. We also find that when splitting the sample into industrialized and non-industrialized countries, the financial development threshold that enables the growth benefits of trade is higher in the former group of countries than in the latter. This finding is consistent with the fact that the export composition of industrialized countries is tilted towards more capital-intensive finance-constrained goods.

Suggested Citation

  • N.R. Ramírez-Rondán & Marco E. Terrones & Andrea Vilchez, 2018. "Does financial sector development affect the growth gains from trade openness?," Working Papers 130, Peruvian Economic Association.
  • Handle: RePEc:apc:wpaper:130
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    References listed on IDEAS

    as
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    Keywords

    Trade openness; growth; threshold model; panel data;

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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