Trade Liberalization, Capital Account Liberalization, and the Real Effects of Financial Development

2007. Journal of International Money and Finance. Volume 26, Issue 5, Pages 730-761. https://doi.org/10.1016/j.jimonfin.2007.04.011

Claudio Raddatz K, Matías Braun

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.

Palabras claves: Trade liberalization, Capital account, liberalization, Financial development

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