The Causal Relationship Among Economic Growth, Financial Development and Trade Openeness in Indian Economy

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The Causal Relationship among Economic

Growth, Financial Development and Trade
Openess in Indian Economy
Article June 2015
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Leena Ajit Kaushal
Nehha Pathak
Management Development Institute Gurgaon
GD Goenka World Institute
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International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.
The Causal Relationship among Economic Growth, Financial

Development and Trade Openess in Indian Economy
Leena Ajit KAUSHAL*
Associate Professor of Economics, Amity School of Economics, Amity University,
India. E-mail: leenakaushal123@gmail.com.
Neha PATHAK
Associate Professor of Economics, GD Goenka World Institute, Lancaster University,
United Kingdom.
ABSTRACT
The objective of the paper is to assess the causal relationship among Trade Openness, Financial Development
and Economic Growth in India for the post liberalization period ranging from 1991-2013.The paper uses Vector
auto-regression and Granger Causality test as econometric methodology for empirical findings. The empirical
findings indicate that growth of a nation which is developing as in the case of India leads to Trade Openness
(export and import). Growth is also seen as a significant factor to impact private credit which in turn is seen to
cause Trade Openness. Financial Development (Private credit and money supply) have causal impact on Trade
Openness by effectively allocating resources to promote productivity growth along with technological
upgradation. Hence the findings support the philosophy of growth led trade. Neo classical growth model
attributes technological change as the cause of growth which is possible with the wisely crafted economic
policies like FDI in various sectors of the country and India seems to be pretty active on this front.
JEL Classification: F4; O2.
Key Words: Trade Openness; Financial Development; Economic Growth; India; Cointegration; Granger
Causality; Vector Auto-Regression.
*Corresponding author.
1.
INTRODUCTION
Like most of the developing countries, economic policies in India aim to attain sustainable growth of the
economy. The relationship between international trade, Financial Developments and Economic Growth has been
subject of interest for various theoretical and empirical studies (Kar et al., 2008; Marelli & Signorelli, 2011). The
new strand of models under endogenous growth theories provides conceptual framework to analyze the impact
of Trade Openness on the growth. Greenaway & Sapsford (I994) investigated the relationship between export
and growth on a sample of 14 countries based on the fundamental growth theories and suggested that export and
growth had a weak but positive relationship. Alwyn Young (2001) used endogenous growth model to
investigate the dynamic effect of international trade on technical progress and growth. The results suggest that
developing countries by and large experience technical progress and growth due to free trade policies compared
to the countries that follow autarky. Neo classical growth model attributed technological change as the cause of
growth linked to the free trade, but was weak in formulating a robust framework to deal with long term growth.
Contributions to endogenous growth models made by Romer (1986), Prescott & Boyd (1987) and Lucas (1988)
provided a good framework to investigate the relationship between trade policy and long run growth.
In the light of new growth theories, India akin to other developing nations in 1991 followed the path of economic
liberalization in both trade and Financial sector to accelerate nations Economic Growth. Government attempted
to open the Indian economy to the outside world. Prior to 1991, India followed very tight economic and
Financial policies, inclusive of highly protective trade regime and regulated industrial investments. Unstable
growth and macroeconomic imbalances on borrowing and current account deficit during early 1990s initiated
series of stabilization and structural reforms by the Indian Government. The crucial argument in favor of this
policy change lies in realization of liberalization benefits to overcome production inefficiencies and
consequently accelerating Economic Growth. Bencivenga and Smith (1991) suggest that endogenous growth
International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society
http://www.econ-society.org

model is capable of influencing growth through finance by promoting higher savings and higher returns on
investments.
The objective of the study is to investigate the causal relationship between Trade Openness, Financial
Development and Economic Growth in India. Post liberalization Indias economy has opened up for
international trade but and the countrys Economic Growth and international trade still lag behind many
developing countries like China, Singapore etc. Several empirical studies argue that outward-oriented
economies have higher potential for Economic Growth. Hence, according to the objective of the paper the
causal relation between trade openeness, growth and Financial Development need to be identified to either
support growth-led trade or trade-led growth for India. It was interesting to study the causal link between these
variables using vector auto-regression framework (VAR) and Granger causality technique to understand the
robustness of liberalization policies and Financial Development in accelerating Economic Growth and the
interrelationship between these variables in the developing nation like India.
There has been quite a bit work done in this field, but the results show variation across countries. According to
D.H. Kim et.al., (2012) the endogenous growth theory has initiated research interest in probing Economic
Growth across nations through two strands, finance-growth nexus and trade- growth correlation. According to
this study the Financial intermediaries and markets may produce information about profitable ventures, diversify
risks and facilitate resource mobilization .Financial Development hence, could help in effectively allocating
resources to promote productivity growth which could result in long run Economic Growth. There is also the
possibility of reverse feedback from growth to finance as faster growth may result in efficient resource
allocation. This study uses VAR and Granger causality technique to find the causal relation between Finanncial
Development, growth and trade openeness during the post liberalization period of 1991-2013. The paper is
organized into five sections.The second section briefely highlights the work on Trade Openness, Financial
Development and Economic Growth by various other reserachers largely in developing countries and provides
background for the thesis of the paper. Section three deals with econometric methodology, section four discusses
results and findings and the last section concludes.
The study empirically estimates the following relationships:
1. Causal effects of Trade Openness and Financial Development on Economic Growth.
2. Causal effects of Trade Openness and Economic Growth on Financial Development.
3. Causal effects of Economic Growth and Financial Development on Trade Openness.
The paper is structured as followings: Section 2 presents literature review, section 3 defines methodology,
section 4 provides results and discussions, and section 5 concludes the study.
2. LITERATURE REVIEW
The study by Ahmed et al. (2008) reveals that trade liberalization had a positive and significant effect on
Financial reforms by promoting Financial inflow of capital and trade related reforms by promoting exports.
These reforms promoted Africas competitiveness and helped earn recognition on the global front. Alwyn
Young (2001) argued that the post world war, economies like Hongkong, Singapore, Korea and Taiwan that had
outward oriented policies had higher growth and technological progress compared to protectionist economies
like Korea and Ghana with inward oriented policies. Innovation and up gradation is key to survival according to
the survival of the fittest theory, hence domestic businesses will upgrade their technology to face completion in
the market by the foreigners. Scales of economies could be exploited by exporting across boundaries and also the
spillover effect due to the sharing of knowledge across countries.
The study by Aubhik Khan (2001) suggest that limited borrowing avenues turn producers with upgraded
technology to access Financial intermediary loans and obtain higher returns to investment compared to other
producers. This directed other producers to espouse latest technologies and access investment loans, henceforth
reduced the cost of Financial intermediation and raised the overall return on investments and Economic Growth.
Marelli, E. & Signorell M. (2011) used panel data model for India and China from 1980-2007 to
econometrically investigate the impact of and Trade Openness and FDI on Economic Growth . The results
indicated positive impact of these variables on Economic Growth of both the countries by controlling a key
variable of gross capital formation and their integration with the world economy was driven by liberalization
policies.

A study by Manni U.H. & et.al. (2012) suggest that Trade Openness or liberalization in Bangladesh after 1990s
has a favorable effect on Economic Growth. The key variables that promoted robust Economic Growth include
international capital, FDI and balance between import and export growth. The result confirms that export
promoting macroeconomic policies within nation also contributes to the rising Economic Growth. D.H Kim et.
al., (2012) empirically investigated the interaction among Economic Growth, Financial Development and Trade
Openness using panel of 63 countries over the period 1960-2007 and indicated significant interaction between
the three variables. The results revealed that with controlled reverse causation, trade promotes Economic Growth
in high-income, low-inflation, and nonagricultural countries but has a negative impact on growth in countries
with the opposite attributes. The study also revealed coexistence of a positive effect of Financial Development
on trade and a negative effect of trade on Financial Development in poorer countries. In richer countries,
Financial Development stimulates Trade Openness whereas trade has an ambiguous impact on Financial
Development. The study on the whole showed potentially non-linear and asymmetric interaction between growth
trade and Financial Development.
According to Harrison (1996) in developing countries causality is bi-directional running from Trade Openness to
Economic Growth and vice versa whereas Yucel (2009) indicated bi-causal relationship between Trade
Openness, Financial Development and Economic Growth in Turkey. Yanikkaya (2003) investigates link between
Trade Openness and Economic Growth using cross sectional data of both developing and developed countries
and finds that Economic Growth affects Trade Openness.
3. METHODOLOGY
The study investigates the impact of causal relationship among Trade Openness, Financial Development and
Economic Growth in India during post liberalisation period ranging from 1991-2013.Granger Causality test is
conducted to examine the causal relationship between the above mentioned variables. The model used in this
study is based on the principles of earlier study conducted by Chimboi (2010) for studying Economic Growth in
Brazil. Kar Mushin et.al.,(2008) in his study used wide variety of monetary and credit aggregates as the proxies
for Financial Development because they can incorporate maximum information of Financial Development.
The variables that are used as proxy to Financial Development in the present study include:
1.
2.
3.
Domestic credit to Private sector (PC) as a percentage of Gross Domestic products (GDP)
Domestic credit provided by Financial sector (DC) as a percentage of GDP
Broad Money (BM) as a percentage of GDP
As suggested by Kim D.H et.al., (2011), Manni at,al., (2012) and Marelli,E, et. al.,(2011) merchandise trade as a
percent of GDP is used as a proxy for measuring trade liberalization.
Real gross domestic product is one of the most commonly used measures by economist and researchers to
measure the Economic Growth of a country. In this study we have used the annual percentage growth rate as an
indicator of Economic Growth.
3.1 Model Specification
The following model is used to demonstrate the causal relationship between Trade Openness, Financial
Development and Economic Growth in India.
FDt =f (GR, TO)
(1)
FDt =0 +1 GRt +2 TOt +t
(2)
Where:
FD is Financial Development proxied by Domestic Credit (DC), Private Credit (PC) and Broad Money (BM).
GR is Growth rate of GDP
TO is Trade Openness; and
0 ,1 2 is a constant term, t is a time trend, and is a random error term.

Financial Development is being proxied by three variables hence there are three models to separate the three
variables and determine the Granger causality of these variables with GR and TO:
Model 1:
DCt = 0 +1 GRt +2 TOt +1t
Model 2:
PCt = 0 +1 GRt +2 TOt +2t
Model 3:
BMt =0 +1 GRt+2 TOt +3t
3.2 Estimation Technique
3.2.1 Unit Root Test
Unit root tests the order of integration of individual series in the model. The Augmented Dickey-Fuller (ADF)
test is used to examine the stationarity of data .The test relies on rejecting a null hypothesis of unit root (the
series are non-stationary) in favor of the alternative hypotheses of stationarity of series. The tests are conducted
without a deterministic trend (t) and intercept for each of the series.
3.2.2 Vector Auro Regression (Co-integration test)
The data is tested for cointegration by using Johansen and Juselius multivariate cointegration test. The presence
of cointegration signals that the variables in the long run move together and even if the series have a trend still
the difference between them is constant. If the series are cointegrated then they are subjected to vector error
correction model. Trace test and Maximum Eigenvalue test are considered to determine the number of cointegration vectors. The null hypothesis in each case is that there is no co integrating variables at 0.05 levels.
3.2.3 Granger-Causality Test
After testing of the Cointegration relationship, tests are run for causality among Financial Development, Trade
Openness and Economic Growth in India. If the variables are co-integrated, an Error Correction term (ECT) is
required else run test for granger causality. In the study trace test and maximum Eigenvalue indicates 1
cointegrating eqnation at the 0.05 level only in Model1.
4. EMPIRICAL RESULTS
4.1 Unit root test
Augmented Dickey Fuller test is used to determine the stationarity and the order of integration of variables. The
ADF test reveals that the variables were not stationary in levels and there is presence of unit root, consequently
the null hypothesis is accepted stating the presence of non - stationarity. Next, the variables were tested at first
difference and the result in Table 1shows that the variables are stationary, rejecting the null hypothesis. Hence
the variables are integrated of order one 1(1).
4.2 VAR Model (Cointegration test)
After confirming the stationarity of the variables at 1(1), variables are next tested for cointegration. The presence
of cointegration suggests long run relationship and common trend among variables. Johansen and Juselius
multivariate cointegration test is used to test the co integration among variables. The results of both trace statistic
and maximum Eigen value statistic indicate one cointegrating equation at the 5 percent level of significance in
Model 1, suggesting that there is one co integrating relation between GR, TO and DC (Direct Credit, used as a
proxy measure of Financial Development.


This model is then tested for Vector Error correction (VEC). The results reported in Table 7 shows that C(1) is
the coefficient of co integrating model, it is the error correction term and also known as speed of adjustment
towards equilibrium. C(1) is negative but insignificant at 5 percent level of significance, which indicates the long
run casualty running from Direct credit to Trade Openness and Growth is not significant. Undergoing coefficient
diagnostic and Walt test results indicate that there is also no short run causality running from Direct credit to
Trade Openness and Growth because p value is more than 5 percent hence null hypothesis of no short run
casualty cant be rejected. F statistics is also insignificant stating the Model has not fitted well. Hence we drop
the Model 1 and the granger test will be run for the other two Models.
4.3 Granger Causality test
Model 2
Granger-causality results of Model 2 reported in Table 9 shows that the null hypothesis (H0): GR does not
Granger causes PC is accepted at 5 percent level of significance. The null hypothesis (H0): PC does not Granger
cause GR is accepted. The null hypothesis (H0): TO does not Granger causes PC is accepted. The null
hypothesis (H0): PC does not Granger cause TO be rejected, hence the alternate hypothesis (H1): PC does
Ganger cause TO be accepted indicating uni-directional causality running from Private Credit to Trade
Openness.
The null hypothesis that TO does not Granger causes GR is accepted. The null hypothesis (H0): GR does not
Granger causes TO be rejected, hence the alternate hypothesis (H1): GR does Ganger cause TO be accepted
indicating uni-directional causality running from Growth to Trade Openness.
Model 3
Granger-causality results reported in Table 10 indicates that the null hypotheses (H0): GR does not Granger
cause BM is accepted. The null hypothesis (H0): BM does not Granger cause GR is accepted.
The null hypothesis (H0): TO does not Granger causes BM is accepted. The null hypothesis (H0): BM does not
Granger Cause TO be rejected, hence the alternate hypothesis (H1): BM does granger cause TO be accepted
indicating a uni-directional causality running from Money Supply to Trade Openness.
The null hypothesis (H0): TO does not Granger causes GR is accepted. The null hypothesis (H0): GR does not
Granger Cause TO be rejected and the alternate hypothesis (H1): that GR does Ganger cause TO be accepted
indicating uni-directional causality running from growth to Trade Openness.
5. CONCLUSION
The purpose of the study is to examine the causal relationship among Financial Development, Trade Openness
and Economic Growth in India using annual data sourced from World Bank, for the post liberalization period
1991-2013.The data was tested for stationarity using Augmented Dickey-Fuller test (ADF) which was found to
be stationary at first difference. Johansen multivariate test was used to test the long run relationship of the
variables in all the three models. The results show that there is no cointegration among the GR, TO and proxies
of Financial Development, PC and BM except for one, DC.
This model was further tested for Vector Error Correction (VER) where it was found that the there is neither
significant long run relationship between DC, GR and TO nor short run relationship. Significance of F-statistics
in Wald test shows that the model has not fitted well; hence Model 1 was dropped for further Granger causality
test. Granger causality test is carried out with two lag length.
The results of Granger-causality test suggest that Trade Openness and Financial Development do not have causal
impact on Economic Growth; conversely Growth does have causal impact on trade and Financial Development
(Private Credit). Growth (GR) has causal effect on Trade Openness which indicates the support for growth-led
trade instead of trade-led growth; this follows the findings of Soukhakian (2007) in Japan and Chimobi (2010) in
Nigeria.
Private credit (PC) and Broad Money (BM), as a percentage of GDP does not have causal impact on Economic
Growth (GR) rather Economic Growth was seen to necessitate Private Credit as a proxy of Financial
Development. On the other hand, Private Credit and Broad Money both the instruments of Financial

Development was seen to cause Trade Openness; which means that Growth seems to have causal impact on
Private Credit which in turn has causal impact on Trade Openness (TO).
6. DISCUSSION
The findings of the study indicate that Growth and Financial Development have a positive effect on Trade
Openness due to their causal impact on the Trade Openness. Economic Growth seems to impact Financial sector
performance by effectively allocating resources to promote productivity growth in sync with technological
upgradation which in turn is capable of enhancing Indias participation in the global trade (Trade Openness). The
study recommends that India should consider economic policies that support growth led trade where
dependence on Foreign Direct investment might be a feasible option. The current government in India is
endorsing liberal economic policies and is supporting increased FDI flow in the nation. Technology spillover and
investment is expected to have same positive effect on Indias growth as in China. Easy and cheap availability of
finance could increase the borrowers net worth to debt ratio making financing effective and return on
investment positive leading to Economic Growth.
The empirical findings indicate that growth of a nation which is developing as in the case of India leads to Trade
Openness (export and import). Growth is also seen as a significant factor to impact Private Credit which in turn
is seen to cause Trade Openness. Hence the findings support the philosophy of growth led trade. Neo classical
growth model attributes technological change as the cause of growth which is possible with the wisely crafted
economic policies like FDI in various sectors of the country and India seems to be pretty active on this front.
REFERENCES
Alwyn, Y. (1991). Learning by Doing and the Dynamic Effects of International Trade. Quarterly Journal of
Economics 106 (May 1991): 369-405.
Bencivenga, V. R., & Smith, B. D. (1991). Financial intermediation and endogenous growth. The Review of
Economic Studies, 58(2), 195-209.
Balasubramanyam, V. N., Salisu, M., & Sapsford, D. (1996). Foreign direct investment and growth in EP and IS
countries. The Economic Journal, 92-105.
Chimobi, O. P. (2010), Causality between Money and Inflation in the Nigerian Economy, International Journal
of Economic Perspectives, 4 (1): 363-370.
Greenaway, D., & Sapsford, D. (1994). What does liberalisation do for exports and growth?.
Weltwirtschaftliches Archiv, 130(1), 152-174.
Harrison, A. (1996). Openness and growth: A time-series, cross-country analysis for developing countries.
Journal of Development Economics, 48(2), 419-447.
Kar, M., Nazlioglu, S., & Agir, H. (2014). Trade Openness, Financial Development, and Economic Growth in
Turkey: Linear and Nonlinear Causality Analysis. Journal of BRSA Banking and Financial Markets, 8(1), 63-86.
Kim, D. H., Lin, S. C., & Suen, Y. B. (2012). The simultaneous evolution of Economic Growth, Financial
Development, and Trade Openness. The Journal of International Trade & Economic Development, 21(4), 513537.
Khan, A. (2001). Financial Development and Economic Growth. Macroeconomic Dynamics, 5(03), 413-433.
Lucas, R.E., 1988. On the mechanics of economic Development. Journal of Monetary
Economics 22, 342.
Manni, U. H., Siddiqui, S. A., & Afzal, M. N. I. (2012). An empirical investigation on Trade Openness and
Economic Growth in Bangladesh economy. Asian Social Science, 8(11), p154.
Marelli E., Signorelli M. (2010) (eds.), Economic Growth and Structural Features of Transition, Palgrave
Macmillan, London and New York. Available on: http://www.palgrave.com/PDFs/9780230235700.Pdf.
10

[Accessed on 12th November 2014]
Marelli, E., & Signorelli, M. (2011). China and India: openness, trade and effects on Economic Growth.
European Journal of Comparative Economics, 8(1), 129-154.
Prescott, E. C., & Boyd, J. H. (1987). Dynamic coalitions: engines of growth. The American Economic Review,
63-67.
Romer, P.M., 1986. Increasing returns and long run growth. Journal of Political Economy, 94 (5), 10021037.
Soukhakian, B. (2009), Financial Development, Trade Openness and Economic Growth in Japan: Evidence from
Granger Causality Tests, International Journal of Economic Perspectives, 1 (3): 118-127.
Yanikkaya, H. (2003) .Trade Openess and Economic Growth : Across cross country Empirical Investigation.
Journal of Development Economics, 72 (1): 57-89.
Yucel, F. (2009). Causal relationship between Financial Development, Trade Openness andEconomic Growth:
The case of Turkey. Journal of Social Sciences, 5(1).

11

APPENDIX
Table 1. Unit Root Test for stationarity at First difference
Table: 1.1
Null Hypotheis: D(PC) has a unit root
Exogenous: Constant
Lag Length: 1
t-Statistic
Prob.*
Augmented Dickey-Fuller test statistic
Test critical values
-4.754044
1% level
5% level
10% level
0.0307
-3.808546
-3.020686
-2.650413
*MacKinnon (1996) one-sided p-values

Table: 1.2
Null Hypothesis: D(GR) has a unit root
Exogenous: Constant
Lag Length: 1
t-Statistic
Prob.*
Augmented Dickey-Fuller test statistic -4.633014
1% level
5% level
10% level
0.0017
-3.808546
-3.020686
-2.650413

Table 1.3
Null Hypothesis: D(BM) has a unit root
Exogenous: Constant
Lag Length: 0
t-Statistic
Prob.*
-3.150367
1% level
5% level
10% level
0.0380
-3.788030
-3.012363
-2.646119

Table: 1.4
Null Hypotheis: D(DC) has a unit root
Exogenous: Constant
Lag Length: 0
t-Statistic
Prob.*
-3.750541
1% level
5% level
10% level
0.0108
-3.788030
-3.012363
-2.646119

12

Table 1. Unit Root Test for stationarity at First difference (Continued)
Table :1.5
Null Hypotheis: D(TO) has a unit root
Exogenous: Constant
Lag Length: 0
t-Statistic
Prob.*
-7.074457
1% level
5% level
10% level
0.0000
-3.788030
-3.012363
-2.646119

13

Table: 2 Unrestricted Co integration Test (Maximun Eigenvalue) for Model 1
Series: DC GR TO
Lags interval (in first differences): 1 to 1
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
None *
At most 1
At most 2
Eigenvalue
0.734303
0.287471
0.033093
Trace
Statistic
0.05
Critical Value Prob.**
35.65774
7.824331
0.706709
29.79707
15.49471
3.841466
0.0094
0.4844
0.4005
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
None *
At most 1
At most 2
Eigenvalue
Max-Eigen
0.05
Statistic
Critical Value
0.734303
0.287471
0.033093
27.83341
7.117623
0.706709
Prob.**
21.13162 0.0049
14.26460 0.4753
3.841466 0.4005
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level

**MacKinnon-Haug-Michelis (1999) p-values

14
Table: 3 Unrestricted Co integration Test (Maximum Eigenvalue) for Model 2

Series: PC GR TO
Hypothesized
No. of CE(s)
Eigenvalue
Trace
Statistic
0.05
Critical Value
Prob.**
None
0.558430
26.41167
29.79707
0.1169
At most 1
0.349909
9.245866
15.49471
0.3431
At most 2
0.009590
0.202371
3.841466
0.6528
Trace test indicates no cointegration at the 0.05 level

Eigenvalue
MaxEigen
Statistic
0.05
Critical Value
Prob.**
None
0.558430
17.16580
21.13162
0.1643
At most 1
0.349909
9.043495
14.26460
0.2825
At most 2
0.009590
0.202371
3.841466
0.6528
Hypothesized
No. of CE(s)
Max-eigenvalue test indicates no cointegration at the 0.05 level


15
Table: 4 Unrestricted Cointegration Test (Maximum Eigenvalue) for Model 3

Series: BM GR TO
Hypothesized
Trace
No. of CE(s)
Eigenvalue
Statistic
0.05
Critical
Value
None
0.527173
24.33026
29.79707
0.1868
At most 1
0.317643
8.600714
15.49471
0.4036
At most 2
0.026984
0.574455
3.841466
0.4485
Prob.**
Trace test indicates no cointegration at the 0.05 level

Hypothesized
Max-Eigen
No. of CE(s)
Eigenvalue
Statistic
0.05
Critical
Value
None
0.527173
15.72954
21.13162
0.2410
At most 1
0.317643
8.026259
14.26460
0.3761
At most 2
0.026984
0.574455
3.841466
0.4485
Prob.**
Max-eigenvalue test indicates no cointegration at the 0.05 level


16

Table :5 Vector Error Correction Estimates for Model 1
Vector Error Correction Estimates
Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq:
CointEq1
CointEq2
DC(-1)
1.000000
0.000000
TO(-1)
0.000000
1.000000
GR(-1)
-9.987385
-9.705987
(2.66648)
(2.22605)
[-3.74553]
[-4.36019]
12.04109
41.41816
Error Correction:
D(DC)
D(TO)
D(GDP)
CointEq1
-0.221931
1.093058
-0.800301
(0.48812)
(0.64457)
(0.67489)
[-0.45467]
[ 1.69579]
[-1.18582]
0.044141
-1.487826
1.197132
(0.61051)
(0.80619)
(0.84411)
[ 0.07230]
[-1.84550]
[ 1.41821]
-0.052151
-1.135201
0.295406
(0.39464)
(0.52114)
(0.54565)
[-0.13215]
[-2.17832]
[ 0.54138]
0.567505
-0.378533
0.570731
(0.46928)
(0.61970)
(0.64885)
[ 1.20931]
[-0.61084]
[ 0.87961]
0.407959
-0.034195
0.365600
(0.56153)
(0.74152)
(0.77640)
[ 0.72651]
[-0.04611]
[ 0.47089]
0.093459
0.105621
-0.379776
(0.39647)
(0.52355)
(0.54818)
[ 0.23573]
[ 0.20174]
[-0.69280]
-0.127183
-0.09522
0.269159
(0.20968)
(0.27689)
(0.28992)
[-0.60655]
[-0.34389]
[ 0.92839]
-0.199199
-0.024092
0.193555
CointEq2
D(DC(-1))
D(DC(-2))
D(DC(-3))
D(TO(-1))
D(TO(-2))
D(TO(-3))

17
D(GR(-1))
D(GR(-2))
D(GR(-3))
(0.17545)
(0.23169)
(0.24259)
[-1.13535]
[-0.10398]
[ 0.79788]
-1.26892
-2.724307
2.583882
(1.06194)
(1.40232)
(1.46829)
[-1.19491]
[-1.94272]
[ 1.75980]
-0.980748
-1.4899
1.912456
(0.95982)
(1.26747)
(1.32710)
[-1.02180]
[-1.17549]
[ 1.44108]
-0.346143
-0.433942
0.531387
(0.52768)
(0.69681)
(0.72959)
[-0.65598]
[-0.62276]
[ 0.72834]
0.958168
3.932362
-2.136742
(1.40177)
(1.85108)
(1.93816)
[ 0.68354]
[ 2.12436]
[-1.10246]
R-squared
0.646777
0.853854
0.622512
Adj. R-squared
0.091713
0.624196
0.029318
Sum sq. resids

S.E. equation
28.24398
2.008695
49.25158
2.652535
53.99424
2.777312
F-statistic
1.165229
3.717940
1.049423
-30.72603
-36.0086
-36.882
Akaike AIC
4.497476
5.053537
5.145473
Schwarz SC
5.093964
5.650025
5.741961
Mean dependent
1.637586
1.364505
-0.087312
S.D. dependent
2.107668
4.326936
2.818942
Log likelihood
Determinant resid covariance (dof adj.)
68.46884
Determinant resid covariance
3.423941
Log likelihood
-92.57202
Akaike information criterion
14.16548
Schwarz criterion
16.25318

18
Table :6 Equation Estimation

D(DC) = C(1)*( DC(-1) - 9.98738493769*GR(-1) + 12.0410939846 ) + C(2)
*( TO(-1) - 9.70598699591*GR(-1) + 41.4181640516 ) + C(3)*D(DC(
-1)) + C(4)*D(DC(-2)) + C(5)*D(DC(-3)) + C(6)*D(TO(-1)) +
C(7)*D(TO(
-2)) + C(8)*D(TO(-3)) + C(9)*D(GR(-1)) + C(10)*D(GR(-2)) + C(11)
*D(GR(-3)) + C(12)
Coefficient
Std. Error
t-Statistic
C(1)
-0.221931
0.488118
-0.454667
0.6631
C(2)
0.044141
0.610506
0.072302
0.9444
C(3)
-0.052151
0.394643
-0.132148
0.8986
C(4)
0.567505
0.469281
1.209308
0.2658
C(5)
0.407959
0.56153
0.726513
0.4911
C(6)
0.093459
0.396471
0.235726
0.8204
C(7)
-0.127183
0.209684
-0.606545
0.5633
C(8)
-0.199199
0.175451
-1.135355
0.2936
C(9)
-1.26892
1.06194
-1.194907
0.271
C(10)
-0.980748
0.959824
-1.021799
0.3409
C(11)
-0.346143
0.527675
-0.655978
0.5328
C(12)
0.958168
1.401773
0.68354
0.5162
R-squared
0.646777
Mean dependent var
Prob.
1.637586
Adjusted R-squared
0.091713
S.D. dependent var
2.107668
S.E. of regression
2.008695
Akaike info criterion
4.497476
Sum squared resid
28.24398
Schwarz criterion
5.093964
Log likelihood
-30.72603
Hannan-Quinn criter.
4.598426
F-statistic
1.165229
Durbin-Watson stat
2.436567
Prob(F-statistic)
0.434586

19
Table 7: Wald Test

Table: 7.1
Equation:
Test Statistic
Value
Df
Probability
F-statistic
0.534987
(3, 7)
0.6729
Chi-square
1.604960
0.6583
Value
Std. Err.
C(3)
-0.052151
0.394643
C(4)
0.567505
0.469281
C(5)
0.407959
0.561530
Null Hypothesis: C(3)=C(4)=C(5)=0

Null Hypothesis Summary:
Normalized Restriction (= 0)
Restrictions are linear in coefficients.
Table: 7.2 Wald Test

Equation:
Test Statistic
Value
Df
Probability
F-statistic
0.442667
(3, 7)
0.7299
Chi-square
1.328001
0.7225
Value
Std. Err.
C(6)
0.093459
0.396471
C(7)
-0.127183
0.209684
C(8)
-0.199199
0.175451


20
Table:7.3 Wald Test

Equation:
Test Statistic
Value
Df
Probability
0.546094
1.638283
(3, 7)
3
0.6663
0.6507
Value
Std. Err.
C(9)
-1.26892
1.061940
C(10)
C(11)
-0.980748
0.959824
-0.346143
0.527675
F-statistic
Chi-square

21
Table:8 Pair-wise Granger-Causality test between GR, PC and TO
Null Hypothesis:
GR does not Granger Cause PC
Obs
F-Statistic
Prob.
21
3.45575
0.0566
0.75575
0.4857
0.79400
0.4691
5.34636
0.0167
0.33804
0.7181
5.97284
0.0115
PC does not Granger Cause GR

TO does not Granger Cause PC
21
PC does not Granger Cause TO

TO does not Granger Cause GR
21
GR does not Granger Cause TO
Table 9: Pair-wise Granger-Causality test between BM, TO and GR
Null Hypothesis:
GR does not Granger Cause BM
Obs
F-Statistic
21
1.14224
0.3438
0.60306
0.5591
0.17185
0.8436
4.23736
0.0334
0.33804
0.7181
5.97284
0.0115
BM does not Granger Cause GR

TO does not Granger Cause BM
21
BM does not Granger Cause TO

TO does not Granger Cause GR
21
GR does not Granger Cause TO
Prob.

22

The Causal Relationship Among Economic Growth, Financial Development and Trade Openeness in Indian Economy

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The Causal Relationship among Economic

Management Development Institute Gurgaon

GD Goenka World Institute

All in-text references underlined in blue are linked to publications on ResearchGate,

Available from: Leena Ajit Kaushal

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

The Causal Relationship among Economic Growth, Financial

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

FDt =0 +1 GRt +2 TOt +t

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

*MacKinnon (1996) one-sided p-values

*MacKinnon (1996) one-sided p-values

*MacKinnon (1996) one-sided p-values

*MacKinnon (1996) one-sided p-values

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

*MacKinnon (1996) one-sided p-values

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Table: 3 Unrestricted Co integration Test (Maximum Eigenvalue) for Model 2

Trace test indicates no cointegration at the 0.05 level

Max-eigenvalue test indicates no cointegration at the 0.05 level

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Table: 4 Unrestricted Cointegration Test (Maximum Eigenvalue) for Model 3

Trace test indicates no cointegration at the 0.05 level

Max-eigenvalue test indicates no cointegration at the 0.05 level

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Sum sq. resids

Determinant resid covariance (dof adj.)

Determinant resid covariance

Akaike information criterion

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Table :6 Equation Estimation

Mean dependent var

S.D. dependent var

Akaike info criterion

Sum squared resid

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.

Table 7: Wald Test

Null Hypothesis: C(3)=C(4)=C(5)=0

Restrictions are linear in coefficients.

Table: 7.2 Wald Test

Null Hypothesis: C(6)=C(7)=C(8)=0

Restrictions are linear in coefficients.

International Journal of Economic Perspectives ISSN 1307-1637 International Economic Society

International Journal of Economic Perspectives, 2015, Volume 9, Issue 2, 5-22.