The Causal Relationship among Trade Openness, Financial Development and Economic Growth: Evidence from Kuwait

Abstract

The purpose of this paper was to examine empirically the causal relationship among financial development (FD), trade openness (TO) and economic growth (GDP) by using vector autoregressive (VAR) technique in Kuwait for the period 1977-2012. The econometric methodology employed was the Cointegration and Granger Causality test. The stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test. The variables tested stationary at first differences. The Johansen multivariate approach to cointegration was applied to test for the long-run relationship among the variables. Empirical results showed that all variables are I (I) and are significant at 1percent. . Cointegration analysis suggests that there is no cointegration vector among GDP, financial development and the degree of openness of the economy. Granger causality tests based on VAR models show that there is a causal relationship between economic growth and financial development and between the trade openness of the economy and economic growth. Implying support for growth-led financial development and support for trade of openness -led growth. Also, Money supply was the only instrument of financial development that was seen to cause Trade openness.

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