Dynamic Interactions between Trade Globalization and Financial Globalization: A Heterogeneous Panel VAR Approach

ABSTRACT

The postwar period has seen a rapid growth in trade and financial globalization. However, trade globalization has decelerated since the global financial crisis (GFC) and may decelerate even further after COVID-19. An interesting and significant issue is whether trade deglobalization may lead to financial deglobalization. This paper analyzes the dynamic interactions between trade integration and financial integration by employing the panel VAR models that allow full heterogeneity among individual countries. We find that trade integration positively affects financial integration. This result is robust to various specifications of the model. We also find that financial integration tends to positively affect trade integration. However, such a tendency disappeared after the GFC. Our results suggest that the ongoing trade deglobalization may adversely affect financial globalization in the future.