Endogenous Financial and Trade Openness

15 Pages Posted: 27 Apr 2009

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Ilan Noy

Victoria University of Wellington

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Abstract

The authors study the endogenous determination of financial and trade openness. They construct a theoretical framework leading to two-way feedbacks between financial and trade openness and identify these feedbacks empirically. They find that one standard deviation increase in commercial openness is associated with a 9.5% increase in de facto financial openness (% of GDP). Similarly, an increase in de facto financial openness has powerful effects on future trade openness. De jure restrictions on capital mobility have only a weak impact on de facto financial openness, while de jure restrictions on the current account have a large adverse effect on commercial openness. The authors investigate the relative magnitudes of these directions of causality using Geweke's (1982) decomposition methodology. They conclude that in an era of rapidly growing trade integration, countries cannot choose financial openness independently of their degree of openness to trade. Dealing with greater exposure to turbulence by imposing restrictions on financial flows is likely to be ineffectual.

Suggested Citation

Aizenman, Joshua and Noy, Ilan, Endogenous Financial and Trade Openness. Review of Development Economics, Vol. 13, No. 2, pp. 175-189, May 2009, Available at SSRN: https://ssrn.com/abstract=1385487 or http://dx.doi.org/10.1111/j.1467-9361.2008.00488.x

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ilan Noy

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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