Financial Integration: The Role of Tradable and Non-tradable Goods

We examine the effect of financial integration on capital stocks and income per capita, explicitly taking into account the division of output between tradable and non-tradable goods. Capital per worker in a financially integrated country is shown to depend on the size and relative capital-intensity of the tradable sector. Using a panel of 67 countries over the period 1976-1999, we show a weakly positive interaction of financial integration and the tradability of output. However, for sub-samples of countries in the middle range of institutional development, the interaction is strongly negative. This interaction suggests that countries with a large tradable sector will benefit less from financial integration than those with more non-tradable output, and implies that the tradable sector is less capital-intense than the non-tradable sector in these middle-income countries. JEL Classification: E23, F15, F36, F43, O43