IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/17024.html
   My bibliography  Save this paper

Historical Evidence on the Finance-Trade-Growth Nexus

Author

Listed:
  • Michael D. Bordo
  • Peter L. Rousseau

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.

Suggested Citation

  • Michael D. Bordo & Peter L. Rousseau, 2011. "Historical Evidence on the Finance-Trade-Growth Nexus," NBER Working Papers 17024, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17024
    Note: DAE IFM ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w17024.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter L. Rousseau & Richard Sylla, 2003. "Financial Systems, Economic Growth, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 373-416, National Bureau of Economic Research, Inc.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. Romain Wacziarg & Karen Horn Welch, 2008. "Trade Liberalization and Growth: New Evidence," The World Bank Economic Review, World Bank Group, vol. 22(2), pages 187-231, June.
    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    5. Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.),Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677, Elsevier.
    6. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    7. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    8. Bordo, Michael D. & Rousseau, Peter L., 2006. "Legal-political factors and the historical evolution of the finance-growth link," European Review of Economic History, Cambridge University Press, vol. 10(3), pages 421-444, December.
    9. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    10. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    11. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    12. Rousseau, Peter L., 1999. "Finance, investment, and growth in Meiji-era Japan," Japan and the World Economy, Elsevier, vol. 11(2), pages 185-198, April.
    13. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
    14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    15. Barro, Robert J. & Lee, Jong-Wha, 1994. "Sources of economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 1-46, June.
    16. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-398, March.
    17. Michael D. Bordo & Barry Eichengreen & Douglas A. Irwin, 1999. "Is Globalization Today Really Different than Globalization a Hunderd Years Ago?," NBER Working Papers 7195, National Bureau of Economic Research, Inc.
    18. World Bank, 2009. "World Development Indicators 2009," World Bank Publications - Books, The World Bank Group, number 4367, December.
    19. Rousseau, Peter L. & Wachtel, Paul, 2002. "Inflation thresholds and the finance-growth nexus," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 777-793, November.
    20. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-678, November.
    21. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    22. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
    23. Panicos O. Demetriades & Peter L. Rousseau, 2011. "Government, Openness And Finance: Past And Present," Manchester School, University of Manchester, vol. 79(s2), pages 98-115, September.
    24. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    25. Shleifer, Andrei & La Porta, Rafael & Lopez-De-Silanes, Florencio & Vishny, Robert W., 1997. "Legal Determinants of External Finance," Scholarly Articles 30728041, Harvard University Department of Economics.
    26. Eichengreen, Barry, 2012. "Exorbitant Privilege: The Rise and Fall of the Dollar," OUP Catalogue, Oxford University Press, number 9780199642472.
    27. Robert E. Lucas, 2009. "Trade and the Diffusion of the Industrial Revolution," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 1-25, January.
    28. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    29. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    30. Alesina, Alberto & Perotti, Roberto, 1994. "The Political Economy of Growth: A Critical Survey of the Recent Literature," The World Bank Economic Review, World Bank Group, vol. 8(3), pages 351-371, September.
    31. Dollar, David, 1992. "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, University of Chicago Press, vol. 40(3), pages 523-544, April.
    32. Romain Wacziarg, 2002. "Review of Easterly's The Elusive Quest for Growth," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 907-918, September.
    33. Dan Ben-David, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 653-679.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shahbaz, Muhammad & Bhattacharya, Mita & Kumar, Mantu, 2017. "Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China," MPRA Paper 81609, University Library of Munich, Germany, revised 14 Sep 2017.
    2. Hsin, Chin-Wen & Peng, Shu-Cing, 2023. "Investor propensity to speculate and price delay in emerging markets," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Philipp Heimberger, 2022. "Does economic globalisation promote economic growth? A meta‐analysis," The World Economy, Wiley Blackwell, vol. 45(6), pages 1690-1712, June.
    4. Gunther Capelle-Blancard & Claire Labonne, 2016. "More Bankers, More Growth? Evidence from OECD Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 45(1), pages 37-51, February.
    5. Sane, Renuka & Halan, Monika, 2017. "Misled and mis-sold: financial misbehaviour in retail banks?," Journal of Comparative Economics, Elsevier, vol. 45(3), pages 429-444.
    6. Georgantopoulos, Andreas G. & Tsamis, Anastasios D. & Agoraki, Maria-Eleni K., 2015. "The Euro-adoption effect and the bank, market, and growth nexus: New evidence from EU panels," The Journal of Economic Asymmetries, Elsevier, vol. 12(1), pages 41-51.
    7. Kumar, Saten, 2015. "Regional integration, capital mobility and financial intermediation revisited: Application of general to specific method in panel data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 1-17.
    8. Emmanuel Carré & Guillaume L’œillet, 2018. "The Literature on the Finance–Growth Nexus in the Aftermath of the Financial Crisis: A Review," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 161-180, March.
    9. Narayan, Paresh Kumar & Narayan, Seema, 2013. "The short-run relationship between the financial system and economic growth: New evidence from regional panels," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 70-78.
    10. Atul MEHTA & Joysankar BHATTACHARYA, 2018. "Financial sector development and the poor in developing countries: revisiting the access to finance channel," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(616), A), pages 153-168, Autumn.
    11. Wilfried Kisling & Antonio Tena Junguito, 2019. "German trade finance in South America during the second industrial revolution. La Batalla de Buenos Aires, 1875-1913," Oxford Economic and Social History Working Papers _171, University of Oxford, Department of Economics.
    12. Alexandra D’Onofrio & Peter L. Rousseau, 2018. "Financial Development, Trade Openness and Growth in the First Wave of Globalization," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 105-114, March.
    13. Emmanuel Carré & Guillaume L’Œillet, 2017. "Une revue de la littérature récente sur le nexus finance-croissance après la crise : apports, limites et pistes de recherche," Revue d'économie financière, Association d'économie financière, vol. 0(3), pages 271-290.
    14. Fisayo Fagbemi & Adeyemi Fajingbesi & Geraldine Ejiaka Nzeribe, 2024. "Trade–Finance Nexus: The Centrality of the Quality of Institutions in Sub-Saharan African Leading Economies," Foreign Trade Review, , vol. 59(1), pages 7-25, February.
    15. Popov, Alexander, 2017. "Evidence on finance and economic growth," Working Paper Series 2115, European Central Bank.
    16. Hu, May & Zhang, Jing & Chao, Chichur, 2019. "Regional financial efficiency and its non-linear effects on economic growth in China," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 193-206.
    17. Marques, Luís Miguel & Fuinhas, José Alberto & Marques, António Cardoso, 2013. "Does the stock market cause economic growth? Portuguese evidence of economic regime change," Economic Modelling, Elsevier, vol. 32(C), pages 316-324.
    18. Rockoff, Hugh & White, Eugene N., 2012. "Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo," MPRA Paper 49672, University Library of Munich, Germany, revised May 2013.
    19. Kym Anderson, 2016. "Agricultural Trade, Policy Reforms, and Global Food Security," Palgrave Studies in Agricultural Economics and Food Policy, Palgrave Macmillan, number 978-1-137-46925-0, January.
    20. Vithessonthi, Chaiporn, 2014. "The effect of financial market development on bank risk: evidence from Southeast Asian countries," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 249-260.
    21. IWASAKI, Ichiro & ONO, Shigeki, 2023. "Economic Development and the Finance-Growth Nexus : A Meta-Analytic Approach," CEI Working Paper Series 2023-06, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    22. Ichiro Iwasaki & Evžen Kočenda & Evžen Kocenda, 2023. "Quest for the General Effect Size of Finance on Growth: A Large Meta-Analysis of Worldwide Studies," CESifo Working Paper Series 10740, CESifo.
    23. Mishra, Sagarika & Narayan, Paresh Kumar, 2015. "A nonparametric model of financial system and economic growth," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 175-191.
    24. Rudra P. Pradhan & Mak B. Arvin & John H. Hall, 2019. "The Nexus Between Economic Growth, Stock Market Depth, Trade Openness, And Foreign Direct Investment: The Case Of Asean Countries," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(03), pages 461-493, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bordo, Michael D. & Rousseau, Peter L., 2006. "Legal-political factors and the historical evolution of the finance-growth link," European Review of Economic History, Cambridge University Press, vol. 10(3), pages 421-444, December.
    2. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    3. Raja Almarzoqi & Sami Ben Naceur & Akshay Kotak, 2015. "What Matters for Financial Development and Stability?," IMF Working Papers 2015/173, International Monetary Fund.
    4. Papaioannou, Elias, 2007. "Finance and growth: a macroeconomic assessment of the evidence from a European angle," Working Paper Series 787, European Central Bank.
    5. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    6. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    7. Jean-Pierre Allegret & Sana Azzabi, 2014. "Intégration financière internationale et croissance économique dans les pays émergents et en développement : le canal du développement financier," Revue d’économie du développement, De Boeck Université, vol. 22(3), pages 27-68.
    8. Ahlin, Christian & Pang, Jiaren, 2008. "Are financial development and corruption control substitutes in promoting growth?," Journal of Development Economics, Elsevier, vol. 86(2), pages 414-433, June.
    9. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    10. Narayan, Paresh Kumar & Narayan, Seema, 2013. "The short-run relationship between the financial system and economic growth: New evidence from regional panels," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 70-78.
    11. Thorsten Beck, 2009. "The Econometrics of Finance and Growth," Palgrave Macmillan Books, in: Terence C. Mills & Kerry Patterson (ed.), Palgrave Handbook of Econometrics, chapter 25, pages 1180-1209, Palgrave Macmillan.
    12. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    13. Fajeau, Maxime, 2021. "Too much finance or too many weak instruments?," International Economics, Elsevier, vol. 165(C), pages 14-36.
    14. Seven, Unal & Coskun, Yener, 2016. "Does financial development reduce income inequality and poverty? Evidence from emerging countries," Emerging Markets Review, Elsevier, vol. 26(C), pages 34-63.
    15. Alexandra D’Onofrio & Peter L. Rousseau, 2018. "Financial Development, Trade Openness and Growth in the First Wave of Globalization," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 105-114, March.
    16. Nazima Ellahi & Adiqa Kausar Kiani & Muhammad Awais & Hina Affandi & Rabia Saghir & Sarah Qaim, 2021. "Investigating the Institutional Determinants of Financial Development: Empirical Evidence From SAARC Countries," SAGE Open, , vol. 11(2), pages 21582440211, April.
    17. Chris Doucouliagos & Jakob de Haan & Jan-Egbert Sturm, 2022. "What drives financial development? A Meta-regression analysis [A new database of financial reforms]," Oxford Economic Papers, Oxford University Press, vol. 74(3), pages 840-868.
    18. López-Laborda, Julio & Peña, Guillermo, 2016. "Is financial VAT neutral to financial sector size?," Economics Discussion Papers 2016-31, Kiel Institute for the World Economy (IfW Kiel).
    19. Huang, Ho-Chuan & Lin, Shu-Chin & Kim, Dong-Hyeon & Yeh, Chih-Chuan, 2010. "Inflation and the finance-growth nexus," Economic Modelling, Elsevier, vol. 27(1), pages 229-236, January.
    20. Allen, Franklin & Bartiloro, Laura & Gu, Xian & Kowalewski, Oskar, 2018. "Does economic structure determine financial structure?," Journal of International Economics, Elsevier, vol. 114(C), pages 389-409.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17024. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.