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Does greater financial openness promote external competitiveness in emerging markets? The role of institutional quality

Aman, Zunaira, Granville, Brigitte, Mallick, Sushanta K. and Nemlioglu, Ilayda ORCID: https://orcid.org/0000-0003-4886-963X 2024. Does greater financial openness promote external competitiveness in emerging markets? The role of institutional quality. International Journal of Finance and Economics 29 (1) , pp. 486-510. 10.1002/ijfe.2695

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Abstract

Studies have shown that external capital account liberalisation can boost capital inflows and augment economic development. Nevertheless, in the case of developing and emerging economies (DEE), adverse currency fluctuations could hamper external competitiveness due to relative price differences creating currency overvaluation, which might not be mitigated via financial openness alone. Therefore, this paper uses annual panel data for 35 DEEs over 40 years to explore whether financial openness of countries can help preserve their external price competitiveness, in the presence of greater trade openness and better institutional quality. Our findings suggest that financial openness alone does not aid export competitiveness, unless it is supported by greater trade openness. In addition, both cross country and regional analyses show that financial openness can benefit economies in maintaining their export competitiveness if they have stronger quality of institutions. Our results remain robust when we estimate the role of financial openness and institutional quality jointly on external competitiveness across regions, and during the pre‐ and post‐crisis periods. We conclude that financial openness alone is not sufficient to improve external competitiveness of an emerging economy, but it does help in the presence of greater trade openness or better institutions, enabling reduction in trade costs and thereby making these countries more price‐competitive.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Additional Information: License information from Publisher: LICENSE 1: URL: http://creativecommons.org/licenses/by-nc/4.0/
Publisher: Wiley
ISSN: 1076-9307
Date of First Compliant Deposit: 12 September 2022
Date of Acceptance: 4 August 2022
Last Modified: 05 Feb 2024 15:22
URI: https://orca.cardiff.ac.uk/id/eprint/152501

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