Money, Trade Openness and Growth in India: A Co-Integration Approach
Please cite the paper as:
Sachin Kumar, (2015), Money, Trade Openness and Growth in India: A Co-Integration Approach, World Economics Association (WEA) Conferences, No. 1 2015, Ideas towards a new international financial architecture?, 15th May – 20th July, 2015
The purpose of this study was to examine the causal relationship among Financial Development, Trade Openness and Economic Growth in India for the period 1971-2013. The econometric methodology employed was the Cointegration and Granger Causality test. The stationarity properties of the data and the order of integration of the data were tested using both the Augmented Dickey-Fuller (ADF) test and the Phillip-Perron (PP) test. The variables tested stationary at first differences. The Johansen multivariate approach to cointegration was applied to test for the long-run relationship among the variables and found strong relations between Growth, trade openness and financial development. The Granger-causality empirical findings suggest that trade openness and economic growth does have causal impact on financial development; conversely trade has causal impact on growth and financial development, implying support for trade-led growth and finance-led-growth. However, two important policy implications of the analysis presented in this paper deserve attention. First, although financial deepening has emerged as an important aspect of the economic growth strategy in the Indian context, since the sources of such a deepening may be both domestic as well as external; the importance of a judicious policy mix cannot be neglected, especially in the wake of the current global financial meltdown. Second, as documented in the econometric analysis, the complementarities between trade openness and financial deepening appear to be good. Broad money as percentages of GDP showed causal impact on economic growth and economic growth was seen to necessitate the increasing trend in domestic supply of money. Also, Money supply was the only instrument of financial development that was seen to cause Trade openness and growth.
Sachin Kumar, email@example.com, Research Student, Department of Economics, Indira Gandhi National Open University