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Financial market development and trade openness: evidence from emerging economies

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International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.
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Keywords: F13; G28; O16; bounds testing; emerging economies; financial market development; trade openness

Document Type: Research Article

Affiliations: School of Business Administration, University of Houston-Victoria, Victoria, TX, USA

Publication date: 2014-05-03

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