Financial development and economic activity in advanced and developing open economies: evidence from panel cointegration

Georgios Chortareas, Georgios Magkonis, Demetrios Moschos, Theodore Panagiotidis

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Abstract

This study considers the effects of financial development on output in a panel cointegration framework, focusing on the implications of trade and financial openness. Our analysis indicates that after controlling for cross-sectional dependence, the typical relationship between finance and output does not hold in the long run. This relationship, however, is re-established once we account for economic openness. While trade openness emerges as more important for developing countries, financial openness is more important for advanced economies. In the long run, causality runs from financial development to output in the advanced economies, while in developing economies causality is bidirectional. There is no short-run causality between financial development and output, however.
Original languageEnglish
Pages (from-to)163-177
Number of pages15
JournalReview of Development Economics
Volume19
Issue number1
Early online date27 Jan 2015
DOIs
Publication statusPublished - 1 Feb 2015

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