TY  - JOUR
AU  - Aizenman,Joshua
AU  - Noy,Ilan
TI  - Endogenous Financial and Trade Openness
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10496
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10496
L1  - http://www.nber.org/papers/w10496.pdf
N1  - Author contact info:
Joshua Aizenman
Economics and SIR
USC
University Park
Los Angeles, CA 90089-0043
Tel: 213-740-4066
E-Mail: aizenman@usc.edu

Ilan Noy
Saunders Hall 542
2424 Maile Way
University of Hawaii, Manoa
Honolulu, HI 96822
Tel: 808 9567749
E-Mail: noy@hawaii.edu
AB  - This paper studies the endogenous determination of financial and trade openness. First, we outline a theoretical framework leading to two-way feedbacks between the different modes of openness; next, we identify these feedbacks empirically. We find that one standard deviation increase in commercial openness is associated with a 9.5 percent increase in de-facto financial openness (% of GDP), controlling for political economy and macroeconomic factors. Similarly, 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 large adverse effect on commercial openness. Having established (Granger) causality, we investigate the relative magnitudes of these directions of causality using Geweke's (1982) decomposition methodology. We find that almost all of the linear feedback between trade and financial openness can be accounted for by G-causality from financial openness to trade openness (53%) and from trade to financial openness (34%). We 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 financial turbulence by imposing restrictions on financial flows will likely be ineffectual.
ER  -