On the link between financial market inclusion and trade openness: An asymmetric analysis

Abstract

This study investigates the impact of financial market inclusion, the existence of shadow economy and real output on trade openness for a select group of emerging economies. Trade openness potentially is a major source of economic growth and development. This study is the first employing mixed methods and approaches of Autoregressive Distributed Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL) to estimate the long-run and short-run models for a large group of emerging economies. The more advanced the financial market inclusion is in a country, the higher the financial market development and, eventually, the level of trade openness. This paper examines the asymmetry cointegration approach in line with nonlinearity attribution, using annual data from 1983 to 2014 for 18 emerging economies. Estimate from all models indicate that financial market inclusion has played a significant role in the short run and has symmetric effects on the trade openness of the majority of emerging economies. Also, the nonlinear model and asymmetry cointegration provide more backing.