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Abstract
This study investigates the relationship between financial development, international trade and economic growth for Australia over the period of 1965 to 2010. The autoregressive distributed lag (ARDL) bounds testing approach to cointegration is applied to examine the long-run relationship among the series, whereas stationarity properties of the variables are tested by applying two structural break tests. Results confirm the long-run relationship among the variables. Financial development, international trade, and capital appear as the drivers of economic growth in short and long runs. The feedback effect exists between international trade and economic growth. Financial development Granger causes economic growth validating supply-side hypothesis.
ACKNOWLEDGMENT
This paper was presented at the Asia Pacific Economic and Business History Conference, February 14–16, 2013, Seoul National University, Seoul, South Korea.
Notes
1. 1.Trade intensity equals exports plus imports as share of GDP.
2. 2.Pesaran et al. (Citation2001) have computed two asymptotic critical values—one when the variables are assumed to be I(0) and the other when the variables are assumed to be I(1).
3. 3.In such case, error correction method is appropriate method to investigate the cointegration (Bannerjee, Dolado, & Mestre, Citation1998). This indicates that error correction term will be a useful way of establishing cointegration between the variables.
4. 4.The upper and lower critical bounds by Narayan (Citation2005) are more appropriate for small sample (30 – 80). The critical bounds by Pesaran et al. (Citation2001) are significantly smaller (Narayan & Narayan, Citation2005).
5. 5.If cointegration is not detected, the causality test is performed without an error correction term (ECT).