International Financial and Trade Integration: The Effects of Regional Integration

Svenja Tegtmeier & Julie Wincentsen

Student thesis: Master thesis

Abstract

Developments towards global integration invoke the question of how the depth of regional integration affects the relationship between trade integration and financial integration. Quantity-based measures are employed to estimate trade and financial integration. Fixed effect regressions are utilized to model the relationship between the two. Financial integration is approximated as the net investment position of a country and trade integration is measured as the in- and outflows of goods and services divided by GDP. Panel data from 1990 until 2016 is analyzed and then divided between two equal time periods of 1990 until 2003 and 2004 until 2016. The relationship is tested in the entire sample and, thereafter, in three different regional trade agreements, namely the EU, MERCOSUR and ASEAN. Between 1990 and 2016, no significant relationship is found between financial integration and trade integration. No relationship is uncovered in the complete data sample between 1990 and 2003. A negative relationship is established for all countries between 2004 and 2016. On a regional level, the EU shows a significant positive relationship between international financial and trade integration in the time period of 1990 until 2003, while a significant negative one is identified from 2004 until 2016. MERCOSUR shows no significant relationship for any time period. ASEAN indicates no significant relationship from 1990 until 2016 and from 1990 until 2003, but a negative relationship is found from 2004 until 2016. In addition, this research paper discusses the mechanisms that contribute to the positive and negative relationship. A feedback loop can explain the positive relationship. During severe economic downturns, often rooted in financial crises, the negative feedback loop disseminates and trade integration lags behind financial integration, causing the inverse relationship. The results suggest that deeper regional integration reinforces the relationship between international financial integration and international trade integration.

EducationsMSc in Business, Language and Culture - Business and Development Studies, (Graduate Programme) Final ThesisMSc in Business, Language and Culture - Diversity and Change Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages141
SupervisorsAradhna Aggarwal