Financial development, trade openness and economic growth nexus: Time series evidence for Greece

ABSTRACT: This study examines the linkage among financial development, trade openness and Economic Growth in Greece, within the vector autoregressive framework. Under this study, the Johansen cointegration test is employed to check if there is long run equilibrium among the selected economic variables, taking time-series data for Greece over the period 1960 to 2009. Subsequently, an error correction equation was estimated to show the correcting mechanism for short run relationship to make long run equilibrium. Also, granger causality test was used to analyse the causality between trade, financial development and economic growth. Based on the empirical findings, we identify that there is long run integration among domestic credit, private credit, trade and economic output. The vector error correction formulation also shows there is significant interaction among the variables under the restricted model. Result from VECM reveals that the disequilibrium between the short run and long run relationship clears by 20 percent every year, with trade having positive elastic impact on the economy of Greece. Granger Causality test indicates that the long run relationship existing between real output and trade openness is caused by the changing economic output of Greece, whereas financial development and economic growth show feedback causality. The causality test also shows the nexus between trade and financial development in Greece is a unidirectional flow from trade to financial sector. Keywords: Cointegration, economic growth, financial development, granger causality, Greece. …………………………………………………………………………………………………………………………