This paper provides evidence that international economic integration changes the real effect of domestic financial institutions. Using a cross-country panel we show that domestic financial development has a smaller effect on growth in countries that are open to trade and capital flows than among countries that are closed in both dimensions. We then use sectoral data to show that this decline in the importance of financial development can be explained by its irrelevance for tradable sectors in countries that are fully integrated to the world economy. We also explore the consequences of these findings for the sequencing of reform.
Bibliographical noteFunding Information:
Braun gratefully acknowledges financial support from Fondecyt Chile #1060015. We also thank Andy Berg, Jonathan Ostry, Jeromin Zettelmeyer, and Sergei Antoshin for generously sharing their program with the modified version of the Bai and Perron ( 2003 ) test. We are grateful to the Editor, Michael Dooley – discussant, and participants at the UC Santa Cruz conference. All remaining errors are our own.
- Capital account liberalization
- Financial development
- Trade liberalization