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Complementarity between Bilateral Trade and Financial Integration


  • Shin, Kwanho
  • Yang, Doo Yong


This paper explores the complementarities between bilateral trade in goods and financial assets. By utilizing a gravity model specification with an extended dataset in terms of time span and asset classification as well as alternative instrumental variables, we confirm the existence of positive evidence for complementarities. We find that common factors such as bilateral distance and other economic size variables that determine both cross-border trade and financial flows contribute to complementarity. However, the fact that the estimated coefficients of distance for financial transactions are about half the size of those for trade in goods suggests that physical distance is less important for financial transactions. Furthermore, the significance of distance in explaining bilateral transactions disappears when trade is added as an additional explanatory variable, indicating that distance may not directly influence financial flows. Finally, we also find that there exists another important factor that is responsible for the complementarities that exist between trade and financial integration. This additional factor is a direct causal relationship that acts from both directions between trade in goods and financial transactions, while the directional effects from trade in goods to financial transactions are much stronger.

Suggested Citation

  • Shin, Kwanho & Yang, Doo Yong, 2006. "Complementarity between Bilateral Trade and Financial Integration," MPRA Paper 694, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:694

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    References listed on IDEAS

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    Cited by:

    1. Hong Bum Jang, 2011. "Financial Integration and Cooperation in East Asia: Assessment of Recent Developments and Their Implications," IMES Discussion Paper Series 11-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Bracke, Thierry & Bunda, Irina, 2011. "Exchange rate anchoring - Is there still a de facto US dollar standard?," Working Paper Series 1353, European Central Bank.
    3. Gabriel Mougani, 2012. "Working Paper 144 - An Analysis of the Impact of Financial Integration on Economic Activity and Macroeconomic Volatility in Africa within the Financial Globalization Context," Working Paper Series 375, African Development Bank.
    4. Bank for International Settlements, 2008. "Why is there so little regional financial integration in Asia?," BIS Papers chapters,in: Bank for International Settlements (ed.), Regional financial integration in Asia: present and future, volume 42, pages 38-61 Bank for International Settlements.

    More about this item


    Trade integration; Financial integration; Gravity model;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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