Trade and Financial Development

By Quy-Toan Do, Andrei A. Levchenko. 2004

148 citations recorded by the source corpus.

The differences in financial development between advanced and developing countries are pronounced. It has been observed, both theoretically and empirically, that these differences in countries' financial systems are a source of comparative advantage and trade. This paper points out that to the extent a country's financial development is endogenous, it will in turn be influenced by trade. The paper builds a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: in countries with large financially intensive sectors financial systems are more developed. When a wealthy and a poor country open to trade, the financially dependent sectors grow in the wealthy country, and so does the financial system. By contrast, as the financially intensive sectors shrink in the poor country, demand for external finance decreases and the domestic financial system deteriorates. This paper describes the authors' test model using data on financial development for a sample of 77 countries. The authors find that the main predictions of the model are borne out in the data: trade openness is associated with faster financial development in wealthier countries, and with slower financial development in poorer ones.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e12ca28dc7998c3f07fe9109aef3b102cfd57db2

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Citations in the corpus

Financial development dynamic thresholds of financial globalization: Evidence from Africa (2012, background): “Some studies support the view that policies which encourage openness to external trade tend to boost financial development (Do & Levchenko, 2004; Huang & Temple, 2005).”
Financial liberalization, financial sector development and growth: Evidence from Malaysia (2007, unknown): “Similarly, Do and Levchenko (2004) predict that trade is positively associated with financial system expansion in countries with higher level of economic development.”
Information Asymmetry and Financial Development Dynamics in Africa (2016, unknown): “Accordingly, as we have justified in the Data section, public investment (Huang, 2011), trade (Do & Levchenko, 2004; Huang & Temple, 2005) and foreign aid have been documented to be associated with higher levels of financial development (Asongu, 2014).”
Trade openness, financial openness, and financial development in China (2015, background): “…literature has focused mainly on two-variable relation between trade openness and financial development (Beck, 2002; Braun and Raddatz, 2005; Do and Levchenko, 2004; Mishkin, 2009), financial openness and financial development (Chinn and Ito, 2006; Levine, 2001), and financial openness and…”
Information Sharing and Financial Sector Development in Africa (2017, background): “Huang and Temple (2005) and Do and Levchenko (2004) have shown that trade openness positively affects financial development.”
Does External Trade Promote Financial Development (2005, unknown): “[23] Do, Q.”
FDI and Trade -- Two Way Linkages? (2005, unknown): “The Empirical Literature A number of recent papers have examined the interactions between financial flows and trade (See Albuquerque et al., in press, Do and Levchenko, 2004, Lane and Milesi-Ferretti, 2004, Rose and Spiegel, 2004, Swenson, 2004).”