Heterogeneity of financial institutions in the process of economic and monetary integration in East Asia

Luca Alfieri

The World Economy, 2021, vol. 44, issue 4, 1053-1076

Abstract: The paper aims to assess the influence of the heterogeneity of financial institutions in the relationship between bilateral trade and the monetary integration process in East Asia. I used a structural gravity model with similarity of currency regimes, and I introduced a variable of heterogeneity of financial institutions derived from the World Bank Financial Development and Structure Dataset. The main hypothesis is that the more heterogeneous financial institutions are, the less bilateral trade there is. The results show a negative relationship between trade and the heterogeneity of the financial institutions. A secondary hypothesis is that the potential positive effects of the monetary integration diminish after the introduction of the variable depicting the heterogeneity of financial institutions. The similarity of currency regimes has a negative effect on bilateral trade and that effect increases with the presence of the heterogeneity of financial institutions variable. I made a second estimation concerning 184 countries and territories. The results confirmed the negative and significant relationship between the heterogeneity of the financial institutions and trade. The recent reform plans of ASEAN countries should also consider these aspects, which are not limited to financial integration problems.

Date: 2021
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