Document Type

Honors Capstone Project

Date of Submission

Spring 5-1-2011

Capstone Advisor

Professor Christopher Rohlfs

Honors Reader

Professor Don Dutkowsky

Capstone Major

Economics

Capstone College

Management

Audio/Visual Component

no

Capstone Prize Winner

no

Won Capstone Funding

no

Honors Categories

Social Sciences

Subject Categories

E-Commerce | Finance and Financial Management

Abstract

This paper examines the real per capita gross domestic product (GDP) growth effects of country trade volume interacted with the recent occurrence of banking crisis. Panel macroeconomic data availability permits the inclusion of banking crises which have occurred worldwide over roughly the past five decades.

Linear regression results provide suggestive evidence that greater trade volume, interacted with the recent occurrence of a banking crisis, may have a large, positive effect on real per capita GDP. A 100 point openness index increase causes an average increase of approximately 2.3% per capita GDP when interacted with the presence of a banking crisis. A change from autarky (index zero) to high openness (index 100), for example, substantially offsets the average negative effect of a banking crisis at openness = 0, approximately -6.9% per capita GDP. However, this measurement is imprecise, with robust standard errors of approximately 0.022, or 2.2% of per capita GDP.

Additionally, greater trade openness may aid in the recovery of per capita GDP following a banking crisis. At openness = 0, the average annual effect of each of the ten years following a crisis is -0.2% GDP per capita, approaching statistical significance with robust standard errors of 0.17% GDP per capita, giving the 10-year recovery period a total impact of -2.0% GDP per capita. Interacting openness with years-since-crisis, however, yields an average increase of 0.3% per capita GDP per annum, per 100 openness index points, during the recovery period. This measurement is less precise, however, with robust standard errors of 0.33% GDP per capita. In other words, a banking crisis may put lasting, downward pressure on GDP if no trade is allowed.

I hypothesize that greater preexisting openness may offer countries more options to maintain their consumption components of real per capita GDP via substitution (importing), or to pursue export-led growth policies more easily, as high trade volume would imply the preexistence of developed physical and legal infrastructure for trade activity. Further research is warranted to investigate these mechanisms with greater precision, and to determine if trade openness is serving as a proxy variable for flexibility or resiliency in financial markets, financial openness, generally competent macro policy management or another unknown variable.

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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