The simultaneous evolution of economic growth, financial development, and trade openness

Dong-Hyeon Kim, Shu Chin Lin, Yu Bo Suen

Research output: Contribution to journalArticle

16 Citations (Scopus)

Abstract

This article empirically investigates the interactions among economic growth, financial development, and trade openness through simultaneous equation systems. The identification and estimation of the systems rely on the methodology of identification through heteroskedasticity. The empirical results show that each of the three variables interacts in important ways. When controlling for the reverse causation, trade promotes economic growth in high-income, low-inflation, and nonagricultural countries but has a negative impact on growth in countries with the opposite attributes. Similarly, when accounting for the feedbacks from growth, banks and stock markets have different impacts on economic growth. While banking development is detrimental to output growth, stock market development is more favorable to growth in high-income, low-inflation, and nonagricultural countries. The data also reveal coexistence of a positive effect of financial development on trade and a negative effect of trade on financial development in poorer countries. In richer countries, financial development stimulates trade openness whereas trade has an ambiguous impact on financial development.

Original languageEnglish
Pages (from-to)513-537
Number of pages25
JournalJournal of International Trade and Economic Development
Volume21
Issue number4
DOIs
Publication statusPublished - 2012 Aug 1
Externally publishedYes

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Keywords

  • economic growth
  • financial development
  • identification through heteroskedasticity
  • trade openness

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Aerospace Engineering

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