Working Paper: NBER ID: w17024
Authors: Michael D. Bordo; Peter L. Rousseau
Abstract: We study linkages between financial development, international trade, and long-run growth using data since 1880 for seventeen now-developed "Atlantic" economies and a set of cross-country and dynamic panel data models. We find that finance and trade reinforced each other before 1930, but that these effects did not persist after the Second World War. Financial development has positive effects on growth throughout the sample period, while trade affects growth strongly and independently after 1945. We attribute the rising importance of trade in explaining growth to major post-World War II changes in tariffs and quantity restrictions associated with the GATT, the establishment of the European Common Market, and the gradual elimination of capital controls after 1973. The findings are robust to the use of 'deep' fundamentals such as legal origin and indicators of the political environment as instruments for financial development and trade. Financial development, however, is more closely linked to these fundamentals than trade.
Keywords: finance; trade; growth; historical evidence; economic development
JEL Codes: E44; F14; F15; N1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial development (O16) | Trade (F19) |
| Financial development (O16) | Growth (O00) |
| Financial development (O16) | Growth (O00) |
| Trade (F19) | Growth (O00) |