Analyzing the Impact of Financial Development and Trade Liberalization on Economic Growth in Emerging Economies and Low income Countries (A New Approach to Financial Development Index)

Subject Areas : Financial Knowledge of Securities Analysis

Mona Beheshti ¹ , Abbas memarnezad ² , taghi torabi ³ , Seyyed Shamseddin Hosseini ⁴

1 - PhD Student in Economics, Department of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran.
2 - Assistant Professor, Department of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran. (Corresponding Author)
3 - Associated Professor, Department of Management and Economics, Science and Research Branch, Islamic Azad University Tehran, Iran
4 - Assistant of Professor, Department of Economics, Allame Tabatabai, Tehran, Iran.

Received: 2022-07-16 Accepted : 2022-07-16 Published : 2022-05-22

Keywords: Financial Development, Generalized Method of Moment, Trade Liberalization, Emerging markets,

Abstract :

The debate on the direction of causality between financial development, trade liberalization and economic growth has been comprehensively growing since 1980s in theoretical and empirical literature. The existing literature provides conflicting views of this relationship. Many economists believe that neglecting the effects of financial sector and trade openness on economic growth will provide us with incomplete picture of the growth process.For this reason, the purpose of this paper is to empirically investigate the impact of financial development and trade liberalization on economic growth of selected countries including Iran. we have studied countries based on the IMF Income classification in two groups: emerging markets and middle-income economies, low-income developing countries. Cointegration approach and generalized method of moments Difference estimation (DIF-GMM) are used, in this paper, to investigate the relationship between variables.The results indicate that financial development is positively significantly determining economic growth in all groups. Morever In emerging markets and middle-income economies, trade liberalization (in form of reducing tariff and non-tariff barriers) has positive and significan impact on economic growth. We also found that The good performance of the financial system reinforces the effect of trade liberalization and vice versa.  

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