case of emerging economies, the gap in the investment rate now has a significant
impact on the income gap. Finally note that in both groups, the income gap
significantly depends on the gap in the rate of human capital accumulation, whilst the
gap in labour force accumulation appears to have no effect.
Various robustness checks have been performed to test the sensitivity of the results.
First, to test for the impact of “absolute” rather than “relative” financial openness, the
income-gap equation has been re-estimated using the level of z rather than of dz (and
the same for q and dq). In the basic specification without dk, the estimated coefficient
on z is -0.185 (significant at 5%) for the emerging economies and -0.583 (significant
at 1%) for the full sample. Hence, as expected, countries that are more financially
open in absolute terms tend to experience smaller per-capita income gaps vis-à-vis the
EU-15 average. Second, drawing on the growth literature, differences in the degree of
institutional development have also been entered on the r.h.s. of equation (3). This,
however, does not produce any significant change in the role of financial openness,
even though the point estimate of the coefficient on dz decreases (still significant at
1%) in the group of emerging economies. Finally, different proxies for human capital
accumulation and labour force growth have been tried (e.g., enrolment in secondary
rather than tertiary school, population growth rather than fertility rate). Similarly,
different indicators of the depth of domestic financial intermediation have been
considered (e.g., the M2 to GDP ratio and the domestic credit to the private sector to
GDP ratio). In general the coefficient on dz always retains its sign and level of
statistical significance.
4.2 Financial openness and trade in goods and services.
Estimates of the gravity equation (6) are presented in Table 2. Columns I to IV refer
to estimates for the group of emerging economies; columns V to VIII refer to
estimates for the group of 44 countries.
The basic gravity model in column I indicates that the more emerging economies are
financially open, the greater their trade integration with the EU-15 will be. The effect
of domestic financial development is instead marginally insignificant after controlling
for geographical distance and economic size. The next columns II, III and IV indicate
that greater international financial integration also leads to greater bilateral trade
flows with the EU-15 and that the effects of financial variables are substantially
unchanged when the set of regressors is extended to include a dummy for common
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