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The bounds test approach for cointegration and causality between financial development, international trade and economic growth: the case of Cyprus

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  • Hatice Pehlivan Jenkıns
  • Salih Turan Katırcıoglu

Abstract

This study employs the bounds test for co-integration and Granger causality tests to investigate the long-run equilibrium relationship and the direction of causality between financial development, international trade and real income growth for the Cyprus economy. The results of the study reveal that financial development as measured by broad money (M2), international trade and real income growth are cointegrated; thus, a long-run equilibrium relationship can be inferred among these three variables. On the other hand, Granger causality test results suggest that in Cyprus the growth in real income stimulates the growth of international trade (both exports and imports) and the growth of money supply. Furthermore, growth in imports of goods and services also stimulates a growth in exports of goods and services of Cyprus. Although this result contradicts our initial expectations, it indicates the importance of capital inflows in Cyprus that plays a major role in financing the investments mainly in the tourism sector. As a final point, the results of this study reveal that the supply-leading, export-led growth and import-led growth hypotheses are not confirmed by this study whereas the demand-following hypothesis can be justified for the Cypriot economy when M2 measure of money supply is under consideration.

Suggested Citation

  • Hatice Pehlivan Jenkıns & Salih Turan Katırcıoglu, 2010. "The bounds test approach for cointegration and causality between financial development, international trade and economic growth: the case of Cyprus," Applied Economics, Taylor & Francis Journals, vol. 42(13), pages 1699-1707.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:13:p:1699-1707
    DOI: 10.1080/00036840701721661
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    Citations

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    Cited by:

    1. Phouphet Kyophilavong & Gazi Salah Uddin & Muhammad Shahbaz, 2016. "The Nexus between Financial Development and Economic Growth in Lao PDR," Global Business Review, International Management Institute, vol. 17(2), pages 303-317, April.
    2. repec:rss:jnljee:v4i5p3 is not listed on IDEAS
    3. Shahbaz, Muhammad, 2012. "Does trade openness affect long run growth? Cointegration, causality and forecast error variance decomposition tests for Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2325-2339.
    4. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers 2014-447, Department of Research, Ipag Business School.
    5. Shaheen, Safana & Awan, Masood Sarwar & Waqas, Muhammad & Aslam, Muhammad Amir, 2011. "Financial Development, International Trade and Economic Growth: Empirical Evidence from Pakistan," MPRA Paper 32876, University Library of Munich, Germany.
    6. Najia Saqib, 2015. "Review of Literature on Finance-Growth Nexus," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 5(4), pages 1-11.
    7. Nahed Zghidi & Zouheir Abida, 2014. "Financial Development, Trade Openness and Economic Growth in North African Countries," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(53), pages 91-120, September.
    8. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2014. "Industry co-movement and cross-listing: Do home country factors matter?," Japan and the World Economy, Elsevier, vol. 32(C), pages 96-110.
    9. repec:rss:jnljfe:v1i4p2 is not listed on IDEAS
    10. Katircioğlu, Salih Turan & Taşpinar, Nigar, 2017. "Testing the moderating role of financial development in an environmental Kuznets curve: Empirical evidence from Turkey," Renewable and Sustainable Energy Reviews, Elsevier, vol. 68(P1), pages 572-586.
    11. Wajahat Ali & Azrai Abdullah & Muhammad Azam, 2016. "The Dynamic Linkage between Technological Innovation and carbon dioxide emissions in Malaysia: An Autoregressive Distributed Lagged Bound Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 6(3), pages 389-400.
    12. Muhammad, Shahbaz & Mohammad, Mafizur Rahman & Abdul, Farooq, 2012. "Financial Development, International Trade and Economic Growth in Australia:New Evidence from Multivariate Framework Analysis," MPRA Paper 42023, University Library of Munich, Germany, revised 17 Oct 2012.
    13. Abla El Khawaga & Mona Esam & Rasha Hammam, 2014. "Exchange Rates and Interest Rates: An Empirical Investigation of International Fisher Effect Theory The Case of Egypt (2003-2012)," Working Papers 869, Economic Research Forum, revised Nov 2014.

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