Historical Evidence on the Finance-Trade-Growth Nexus

Michael Bordo and Peter Rousseau

No 17024, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E44 F14 F15 N1 N2 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-fdg, nep-his and nep-int
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Published as Bordo, Michael D. & Rousseau, Peter L., 2012. "Historical evidence on the finance-trade-growth nexus," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1236-1243.

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