Do Finance and Trade Foster Economic Growth in the New EU Member States: Granger Panel Bootstrap Causality Approach

Paweł Kawa, Marta Wajda-Lichy, Kamil Fijorek and Sabina Denkowska

Eastern European Economics, 2020, vol. 58, issue 6, 458-477

Abstract: The aim of this paper is to investigate whether financial development and trade openness enhance economic growth in 11 new EU member states. While the overwhelming studies employ a simple measure of finance (credit to GDP ratio or stock market capitalization), we run growth regressions using a new IMF broad-based measure, which covers three dimensions of financial development: depth, access, and efficiency. We use a bootstrap panel-data approach based on seemingly unrelated regression (SUR) systems, which takes into account cross-sectional dependency and slope heterogeneity among countries. Such an approach gives separate regression coefficients for each country. The main findings are as follows: (1) the statistically significant unidirectional Granger causality from finance to economic growth is evidenced in five countries under examination (Bulgaria, Lithuania, Poland, Romania, and Slovenia); (2) trade openness is statistically significant Granger-cause of growth in six new EU member states (Croatia, Latvia, Lithuania, Romania, Slovakia, and Slovenia); (3) the reverse causalities, i.e. running from growth to finance were found in two countries (Hungary and Slovenia), and from growth to trade openness in Croatia. The policy-oriented recommendation is that new EU member states from Central and Eastern Europe may gain pro-growth benefits from further finance and trade development, however, the policy-makers should be aware of possible nonlinearities and conditionality of these relationships.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mes:eaeuec:v:58:y:2020:i:6:p:458-477

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DOI: 10.1080/00128775.2020.1762497

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