The nexus between financial development and trade performance

Puneet Kumar Arora · Jaydeep Mukherjee

18 citations0/0 files storedJournal of Financial Economic Policy

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Monetary Policy and Economic Impact Global trade and economics Global Financial Crisis and Policies

Abstract

Purpose This study aims to empirically examine the relationship between financial development and trade performance for the Indian economy through a time-series analysis with annual data over the period 1980-2016. Design/methodology/approach The study uses new econometrics techniques such as unit root tests in the presence of endogenous structural breaks and autoregressive-distributed lag bounds test for the analysis. Findings Empirical results reveal that the level of financial development has a significant positive impact on the exports, imports and trade balance of manufactured goods for the Indian economy. Practical implications The findings suggest that the positive effect of financial development on trade performance is a potential mechanism through which the former may affect overall income and growth rates. It also implies that standalone trade liberalisation policies are insufficient to increase Indian exports. Indian policymakers should, therefore, consider the implications of the next set of financial sector reforms on the country’s trade flows, besides their positive impact on the economic performance. The findings are particularly relevant in the present scenario when the export growth is decelerating and there is a marked slowdown in private credit flows because of the problem of non-performing assets. Originality/value This study is the first of its kind which provides a holistic analysis of the relationship between financial development and trade performance for the Indian economy and also investigates the direction of causality between financial development and international trade by considering the possible presence of multiple endogenous structural breaks in the data. Moreover, in contrast to the available literature, the present study focuses on net exports as a key indicator of trade performance rather than trade openness.

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Testing for a Unit Root in Time Series Regression 2003The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1996Financial Dependence and Growth 1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks n.d.The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs.

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2022Interactions of services export, financial development and growth: evidence from India 2024Does financial development and economic growth matter for services export? Cross-country evidence from OECD countries

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