Bordo, Michael & Rousseau, Peter.
How interconnected are finance, trade, and economic growth? This column looks to the past in search of an answer. Examining economies that traded across the Atlantic, it finds that finance and trade reinforced one another between 1880 and 1914 but these links were absent in the post-war period. Financial development has been strongly related to growth throughout the last 130 years, whereas trade had a direct effect on growth only after 1945.
Developing and operating a financial system that fosters and sustains growth is one of today’s most pressing policy questions. The correlation between financial development and growth is well established (Levine 2005), and the roles of trade and export orientation in growth are likewise well accepted (e.g., Dollar 1992; Ben-David,1993; Edwards 1998). The finance and trade interaction, however, has been given scant attention as far as its impact on economic outcomes is concerned (e.g. Baltagi et al. 2009).
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