The Relationship between Financial Openness and Trade Openness in Malaysia

Lim, Li Wen (2021) The Relationship between Financial Openness and Trade Openness in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

In recent decades, financial openness has been one of the most important strategies for developing countries to promote economic growth as these countries lack of capital, lack of access to modern technology and other factors. Based on the past researches where most of them state that financial openness and trade openness do contribute to economic growth of a country. This paper attempts to examine the relationship between financial openness and trade openness in Malaysia. There are two specific objectives of the study which are to examine the causal relationship between the financial openness and trade openness in Malaysia and to examine the short-run and long-run relationship between financial openness, trade openness, GDP and interest rate in Malaysia. Autoregressive distributed lag (ARDL) test is used in this study to test the cointegration and an error correction model based on ARDL approach using time series data for the period 1979 to 2018 in case of Malaysia. This paper reveals the causal relationship between financial openness and trade openness in Malaysia. The finding also shows that GDP and interest rate are also the significance factor that can influence financial openness in Malaysia in the long run and short run. Moreover, the result showed that there are positive long-run relationships between financial openness and trade openness in this research. Meanwhile the financial openness and GDP has showed a positive relationship in short-run and long run. Besides, the interest rate has also showed significant in affecting financial openness but is in a negative coefficient for long-run and also short-run. This study concluded that the trade openness, GDP and interest rate are significant factors to affect financial openness in Malaysia.