We thank Michael Hutchison, Hiro Ito, Nancy Marion, and Shang-Jin Wei for data, two anonymous referees, and the many useful comments we received from seminar participants at the Hebrew University, UCSC, UCLA, the University of Haifa, the University of Illinois (Urbana-Champaign), the University of Hawaii, Tel Aviv University, the University of Washington, and LACEA 2004. Any errors are ours. This paper summarizes the results in Aizenman and Noy (2004).
Endogenous Financial and Trade Openness
Version of Record online: 15 APR 2009
© 2009 The Authors. Journal compilation © 2009 Blackwell Publishing Ltd
Review of Development Economics
Volume 13, Issue 2, pages 175–189, May 2009
How to Cite
Aizenman, J. and Noy, I. (2009), Endogenous Financial and Trade Openness. Review of Development Economics, 13: 175–189. doi: 10.1111/j.1467-9361.2008.00488.x
- Issue online: 15 APR 2009
- Version of Record online: 15 APR 2009
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.