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

Matías Braun, Claudio Raddatz

Research output: Contribution to journalArticlepeer-review

27 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 languageEnglish
Pages (from-to)730-761
Number of pages32
JournalJournal of International Money and Finance
Volume26
Issue number5
DOIs
StatePublished - Sep 2007
Externally publishedYes

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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