Financial Openness and Trade Openness Nexus: Empirical Evidence from Global Data

Abstract

Over the past decades of globalization, most of the countries in the world is eventually opening up their financial markets which is believed to be an engine in fostering economic growth and development. Perhaps, it is not an exemption for their real market (goods and services), in particular market integration with other countries via trade liberalization. Indeed, the ‘interconnectedness’ between these two markets remains unclear from the empiric perspective. The objective of this study is to offer a fresh empirical evidence of financial openness and trade openness nexus. Both de jure (KAOPEN) and de facto (foreign direct investment inflow, FDII and outflow, FDIO) of financial openness are employed to link with trade openness (ratio of total trade, exports and imports to GDP) with an unbalanced panel data of 115 countries spanning between 1970 and 2014. The results of Granger noncausality tests show a two-way causality between de facto financial openness (FDII and FDIO) and trade openness, but it is not the case for de jure measure, in general (full panel data). Also, a two-way causality is observed for high, upper-middle, and low income groups, except for lower-middle income group, in which trade openness causes financial openness. This study does also support the interdependent hypothesis between real sector and financial sector, and this insight has important policy implication.