FINANCIAL DEVELOPMENT, TRADE OPENNESS AND ECONOMIC GROWTH IN DEVELOPING COUNTRIES Recent Evidence from Panel Data

The study investigates the causal relationship between financial development and economic growth in developing countries over the period of 1978-2012. The study empirically explores the channels through which financial development may influence economic growth more specifically in the context of Foreign Direct Investment (FDI) and trade openness. The financial development index is constructed and panel cointegration tests are applied to check the existence of long-run relationship between the variables of interest. The findings of the study show that there are strong evidences of the long-run relationship between financial development and economic growth in developing countries. There exists bi-directional causation between financial development and FDI. Furthermore, trade openness has impact on financial development in all the countries, which calls for the introduction of effective policy measures to promote trade between countries.