Trade liberalization, capital account liberalization and the real effects of financial development

Matías Braun; Claudio Raddatz

doi:10.1016/j.jimonfin.2007.04.011

Trade liberalization, capital account liberalization and the real effects of financial development

Matías Braun, Claudio Raddatz^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

31 Scopus citations

Abstract

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.

Original language	English
Pages (from-to)	730-761
Number of pages	32
Journal	Journal of International Money and Finance
Volume	26
Issue number	5
DOIs	https://doi.org/10.1016/j.jimonfin.2007.04.011
State	Published - Sep 2007
Externally published	Yes

Bibliographical note

Funding 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.

Keywords

Capital account liberalization
Financial development
Trade liberalization

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10.1016/j.jimonfin.2007.04.011

Cite this

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abstract = "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.",

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Trade liberalization, capital account liberalization and the real effects of financial development

Abstract

Bibliographical note

Keywords

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