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Trade Openness and Financial Development in the New EU Member States: Evidence from a Granger Panel Bootstrap Causality Test

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  • Marta Wajda-Lichy
  • Paweł Kawa
  • Kamil Fijorek
  • Sabina Denkowska

Abstract

The goal of this paper is to investigate the causality between trade openness and financial development in 11 new member states in the European Union. We employ a Granger bootstrap panel approach based on seemingly unrelated regressions, which accounts for cross-sectional dependence and slope heterogeneity among the countries in the panel. The main findings are as follows. First, the test results of the finance-trade nexus are country specific. Second, statistically significant causality is found from trade to finance in eight countries (Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovenia). As the regression coefficients are predominantly negative, the demand-following hypothesis on the finance-trade nexus is not supported in the majority of the countries. Third, finance is found to be a statistically significant Granger cause of trade in six countries (Croatia, Estonia, Latvia, Lithuania, Poland, and the Slovakia), and in four of them (the smaller ones: Croatia, Estonia, Latvia, Lithuania), the regression coefficients take positive signs, which support the supply-leading hypothesis.

Suggested Citation

  • Marta Wajda-Lichy & Paweł Kawa & Kamil Fijorek & Sabina Denkowska, 2020. "Trade Openness and Financial Development in the New EU Member States: Evidence from a Granger Panel Bootstrap Causality Test," Eastern European Economics, Taylor & Francis Journals, vol. 58(3), pages 242-263, May.
    • Handle: RePEc:mes:eaeuec:v:58:y:2020:i:3:p:242-263
    DOI: 10.1080/00128775.2019.1701498
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    Cited by:

    1. Dąbrowski, Marek A. & Papież, Monika & Śmiech, Sławomir, 2024. "Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 894-908.
    2. Shahid Iqbal & Abdul Qayyum Khan & Muhammad Yar Khan & Lamya Al-Aali, 2021. "The Dynamics of Financial Development, Government Quality, and Economic Growth in Different Groups of Economies," Sustainability, MDPI, vol. 13(14), pages 1-14, July.
    3. Caporale, Guglielmo Maria & Sova, Anamaria Diana & Sova, Robert, 2022. "The direct and indirect effects of financial development on international trade: Evidence from the CEEC-6," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    4. Ding, Yuanyi, 2023. "Does natural resources cause sustainable financial development or resources curse? Evidence from group of seven economies," Resources Policy, Elsevier, vol. 81(C).
    5. Ha, Le Thanh, 2022. "Effects of digitalization on financialization: Empirical evidence from European countries," Technology in Society, Elsevier, vol. 68(C).
    6. Vicente Aprigliano Fernandes & Ricardo R. Pacheco & Elton Fernandes & Manoela Cabo & Rodrigo V. Ventura & Rafael Caixeta, 2021. "Air Transportation, Economy and Causality: Remote Towns in Brazil’s Amazon Region," Sustainability, MDPI, vol. 13(2), pages 1-14, January.

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