Causal Relationship between Financial Development and International Trade: Evidence from Turkey

Abstract

Over the past few decades, the links between financial development and international trade has preoccupied the minds of economists. However, the direction of causality still remains unresolved in both theory and empirics. In this paper we investigate the causal relationship between financial development and international trade with Toda Yamamoto, using data from 1961 to 2012 about Turkey. According to empirical findings, there is bidirectional causality between financial development and international trade. Also, financial development leads international trade indirectly through both economic growth and exchange rate. On the other hand, there is bidirectional causal relationship between economic growth and financial development.