Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan

SSRN Electronic Journal 01/2011; 2:11-19. DOI: 10.2139/ssrn.1950013

ABSTRACT The study utilizes the Autoregressive-distributed lag (ARDL) approach for cointegration and Granger causality test, to explore the long run equilibrium relationship and the possible direction of causality between international trade, financial development and economic growth for the Pakistan economy. Imports plus exports of goods and services is used as a proxy for international trade, while broad money (M2) and gross domestic product (GDP) are used as the proxies for financial development and economic growth, respectively. Result explores a long run relationship between the variables. In case of Pakistan, economy supply leading hypothesis is accepted. Moreover, unidirectional causality is observed from international trade to economic growth and from financial development to international trade.

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    ABSTRACT: The study investigates effect of trade openness on economic growth in the long run. We apply the ARDL bounds testing approach to test for a long run relationship and the augmented production function by incorporating financial development as an additional determinant of economic growth using the framework of Mankiw (1992). The results confirm cointegration among the series. In long run, trade openness promotes economic growth. The growth-led-trade hypothesis is vindicated by VECM Granger causality test. The causality is also checked by using the innovative accounting approach.
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May 22, 2014