Collective Influence of Financial Sector Development and Economic Growth on International Trade

The purpose of this paper is to investigate the influence of financial sector development on international trade in upper-middle-income countries. The paper focuses on financial stability as a key element of the financial system and investigates whether economic growth is a conduit through which banking sector development and stock market development influence international trade. Thus far, the impact of financial sector development on international trade has received limited attention. The study adopts the generalized method of moments (GMM) approach, employing balanced panel data from 13 upper-middle-income countries for a period ranging from 2006–2017. Using the Z-score as a proxy for financial stability, evidence suggests that banking sector development has a positive and significant influence on international trade, while stock price volatility as a proxy for financial market stability, was found to have had an insignificant influence on foreign trade. The researcher recommends that upper-middle-income countries implement policy measures that enhance financial stability. This could have currency stability implications. A stable currency benefits international trade by reducing exchange rate volatility. Stable exchange rates offer foreign trade participants a predictable environment for trade activities. Further research should be conducted to investigate other channels as possible transmission mechanisms. This paper contributes to the global discourse on whether economic growth is the conduit through which financial sector development can influence international trade. The researcher observed that financial sector development is an integral part of economic growth, and its influence is premised on the financial proxies employed, which yield unique outcomes based on regional economic circumstances.