Heterogeneity of Financial Institutions in the Process of Economic and Monetary Integration in East Asia

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 heterogeneity of financial institutions variable derived from the World Bank Financial Development and Structure Dataset. The 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. The similarity of currency regimes has a negative effect on bilateral trade, and that effect increases with the presence of the financial institutions variable. I made a second estimation concerning 184 countries and territories and I replaced the similarity of currency regimes with a standard currency dummy. 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.