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Journal of Economic Integration 2024 June;39(2) :483-507.
DOI: https://doi.org/10.11130/jei.2024017
Financial Openness and Trade (Real) Openness: Should We Open up Both Markets?

Chew Keong Wai1,2 Tuck Cheong Tang2 Siew Voon Soon 3

1,2Tunku Abdul Rahman University of Management and Technology, Kuala Lumpur, Malaysia
2Department of Economics, Universiti Malaya, Kuala Lumpur, Malaysia
3Department of Decision Science, Universiti Malaya, Kuala Lumpur, Malaysia
Corresponding Author: Tuck Cheong Tang ,Email: tangtuckcheong@um.edu.my
Copyright ©2024 Journal of Economic Integration
ABSTRACT
This study examines the 'interdependence' between financial openness and trade (real) openness, as well as the macroeconomic determinants of such relationship from a general equilibrium perspective (viz. the balance of payments constraint). The macroeconomics factors are national income, exchange rate, and interest rate. The data cover 124 countries over a period spanning between 1970 and 2019. The 'interdependence' between financial and trade openness is captured by a positive Pearson correlation in most of the countries (i.e. between 60% and 79% of the countries). However, a more precise measure of a bidirectional causality between both openness exists in only 35% (44 countries) of 124 countries. The empirical results show that exchange rate explains negatively the estimated correlation coefficients between financial and trade openness, as well as for low income countries. While, the interest rate increases the likelihood of their bidirectional causality results. This study provides policy insights related to both the financial and real markets.

JEL Classification
E44: Financial Markets and the Macroeconomy
F41: Open Economy Macroeconomics
G15: International Financial Markets
Keywords: causality | financial openness | interdependence | real sector | trade openness
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