Finance, Governments, and Trade

Giuseppe Bertola and Anna Lo Prete

No 9338, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how financial transactions may respond to exogenous variation in trade opportunities not only directly, but also through policy channels. In more open economies, governments may find it more difficult to fund and enforce public policies that substitute private financial transactions, and more appealing to deregulate financial markets. We propose a simple theoretical model of such policy-mediated relationships between trade and financial development. Empirically, we document in a country panel dataset that, before the 2007-08 crisis, financial market volumes were robustly and negatively related to the share of government consumption in GDP in regressions that also include indicators of financial regulation and trade openness, and we seek support for a causal interpretation of this result in instrumental variable specifications.

Keywords: Financial reforms; Government size; Openness; Private credit (search for similar items in EconPapers)
JEL-codes: E60 F13 G18 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-cdm and nep-mac
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Citations: View citations in EconPapers (9)

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Journal Article: Finance, governments, and trade (2013)
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