Causality between International Financial Integration and Trade Openness in High Income OECD Countries: Panel Data Analysis

Abstract

Theoretically trade openness and international financial integration should go hand in hand. However, both these variables depend on a number of economic and non-economic factors; as a result, theoretical findings are not always confirmed in reality. In the present paper we try to judge the theoretical perception on the relationship between trade openness and international financial integration with empirical evidences for a panel of 28 High Income OECD countries over the period 1995-2011. Panel unit root test shows that both the series on financial integration and trade openness are integrated of order one. We have applied Pedroni and Kao cointegration tests to find that these two series are cointegrated. Then we have performed vector error correction. Our result confirms the absence of long run causality either from trade openness to international financial integration or from international financial integration to trade openness. We have also tested for short run causality and have found that unidirectional causality exists from international financial integration to trade openness.