Financial Connectedness and Financial Trade Openness

39 Pages Posted: 23 Oct 2019

See all articles by Clara Park

Clara Park

University of Colorado Boulder

Date Written: October 7, 2019

Abstract

What determines a country’s financial trade openness? Because of the importance of financial services in the economy, many governments want to attract trade in financial services, including cross-border trade and FDI in the financial services industry. Therefore, it is commonly assumed that the more the financial sector is linked to the rest of the economy, the more a country will open up trade in financial services. However, my analysis finds that the reverse is true. The more connected the financial industry to the rest of the economy, the more a country restricts its financial trade openness. I argue that a higher degree of financial connectedness exposes more domestic financial firms to competition with foreign financial firms, leading governments to selectively liberalize the financial industry through entry restrictions. To test my argument, I have created two original datasets on financial connectedness and financial trade restrictions in 51 countries. I find the cross-country variation in the degree of financial connectedness to be the key factor determining variation of financial trade openness around the world.

Keywords: Trade in Financial Services, FDI, Financial Connectedness, Input-Output

JEL Classification: F13, F21, F23, F65

Suggested Citation

Park, Clara, Financial Connectedness and Financial Trade Openness (October 7, 2019). Available at SSRN: https://ssrn.com/abstract=3465340 or http://dx.doi.org/10.2139/ssrn.3465340

Clara Park (Contact Author)

University of Colorado Boulder ( email )

Boulder, CO

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