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Are Financial Development and Trade Openness Complements or Substitutes?

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  • Dong-Hyeon Kim
  • Shu-Chin Lin
  • Yu-Bo Suen

Abstract

This article studies the long‐ and short‐run relationships between financial development and trade openness. Using the pooled mean group estimator of Pesaran, Shin, and Smith (1999) for unbalanced panel data for 87 countries over the 1960–2005 period, our empirical results indicate that long‐run complementarity between financial development and trade openness coexists with short‐run substitutionarity between the two policy variables. But when splitting the data into OECD and non‐OECD country groups, this finding can be observed only in non‐OECD countries. For OECD countries, financial development has negligible effects on trade. In addition, we find nonlinearity in the relationship in that long‐run responses of trade decrease with financial development. The article further finds coexistence of negative trade effects of financial fragility and positive trade impacts of financial depth.

Suggested Citation

  • Dong-Hyeon Kim & Shu-Chin Lin & Yu-Bo Suen, 2010. "Are Financial Development and Trade Openness Complements or Substitutes?," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 827-845, January.
    • Handle: RePEc:wly:soecon:v:76:y:2010:i:3:p:827-845
    DOI: 10.4284/sej.2010.76.3.827
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    Cited by:

    1. Caporale, Guglielmo Maria & Sova, Anamaria Diana & Sova, Robert, 2022. "The direct and indirect effects of financial development on international trade: Evidence from the CEEC-6," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    2. Aguima Aime Bernard Lompo, 2024. "How Does Financial Sector Development Improve Tax Revenue Mobilization for Developing Countries?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 66(1), pages 91-125, March.
    3. Fatiha El agri & Mounir Jerry & Ahlam Qafas & Youness Manzah, 2024. "Determinants of the Export Function in Morocco: Evidence from ARDL and Dynamic ARDL Models," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 16(1), pages 98-129, January.
    4. Ha, Le Thanh, 2023. "The role of financial development in enhancing trades in environmental goods: International insights from 119 countries," Journal of Commodity Markets, Elsevier, vol. 29(C).
    5. Kazeem Abimbola Sanusi & Zandri Dickason-Koekemoer, 2024. "Trade Openness, Financial Development and Economic Growth in Lesotho: BVAR and Time-varying VAR Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 14(3), pages 66-75, May.
    6. Megha Chhabra & Arun Kumar Giri & Arya Kumar, 2023. "What Shapes Economic Growth in BRICS? Exploring the Role of Institutional Quality and Trade Openness," Economic Papers, The Economic Society of Australia, vol. 42(4), pages 347-365, December.
    7. Imen Mohamed Sghaier, 2023. "Trade openness, financial development and economic growth in North African countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1729-1740, April.

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