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Finance, Governments, and Trade

  • Bertola, Giuseppe
  • Lo Prete, Anna

We study how financial transactions may respond to exogenous variation in trade opportunities not only directly, but also through policy channels. In more open economies, governments may find it more difficult to fund and enforce public policies that substitute private financial transactions, and more appealing to deregulate financial markets. We propose a simple theoretical model of such policy-mediated relationships between trade and financial development. Empirically, we document in a country panel dataset that, before the 2007-08 crisis, financial market volumes were robustly and negatively related to the share of government consumption in GDP in regressions that also include indicators of financial regulation and trade openness, and we seek support for a causal interpretation of this result in instrumental variable specifications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9338.

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Date of creation: Feb 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9338
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  1. Agell, Jonas, 2001. "On the Determinants of Labour Market Institutions: Rent Seeking vs. Social Insurance," Research Papers in Economics 2001:12, Stockholm University, Department of Economics.
  2. Bertola, Giuseppe & Koeniger, Winfried, 2007. "Consumption Smoothing and Income Redistribution," CEPR Discussion Papers 6051, C.E.P.R. Discussion Papers.
  3. Svaleryd, Helena & Vlachos, Jonas, 1999. "Markets for Risk and Openness to Trade: How are they Related?," SSE/EFI Working Paper Series in Economics and Finance 327, Stockholm School of Economics, revised 10 Sep 2000.
  4. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "Government Ownership of Banks," Working Paper Series rwp01-016, Harvard University, John F. Kennedy School of Government.
  5. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Comparative advantage, demand for external finance, and financial development," Policy Research Working Paper Series 3889, The World Bank.
  6. Paolo Epifani & Gino Gancia, 2009. "Openness, Government Size and the Terms of Trade," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 629-668.
  7. Giuseppe Bertola & Anna Lo Prete, 2008. "Openness, Financial Markets, and Policies: Cross-Country and Dynamic Patterns," Working Papers 2008/13, Czech National Bank, Research Department.
  8. Raj Chetty & Emmanuel Saez, 2010. "Optimal Taxation and Social Insurance with Endogenous Private Insurance," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 85-114 National Bureau of Economic Research, Inc.
  9. John Armour & Simon Deakin & Priya Lele & Mathias Siems, 2009. "How Do Legal Rules Evolve? Evidence from a cross-country Comparison of Shareholder, Creditor and Worker Protection," ESRC Centre for Business Research - Working Papers wp382, ESRC Centre for Business Research.
  10. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  11. Thierry Tressel & Enrica Detragiache, 2008. "Do Financial Sector Reforms Lead to Financial Development? Evidence from a New Dataset," IMF Working Papers 08/265, International Monetary Fund.
  12. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
  13. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
  14. Kleibergen, F.R. & Paap, R., 2003. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Institute Research Papers EI 2003-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  15. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
  16. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
  17. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-79, April.
  18. repec:adr:anecst:y:2009:i:95-96:p:09 is not listed on IDEAS
  19. Ashoka Mody & Abdul Abiad, 2005. "Financial Reform: What Shakes It? What Shapes It?," IMF Economic Issues 35, International Monetary Fund.
  20. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
  21. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
  22. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  23. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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