Historical Evidence on the Finance-Trade-Growth Nexus

25 Pages Posted: 9 May 2011 Last revised: 16 May 2011

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Peter L. Rousseau

Vanderbilt University - Department of Economics

Date Written: May 2011

Abstract

We study linkages between financial development, international trade, and long-run growth using data since 1880 for seventeen now-developed "Atlantic" economies and a set of cross-country and dynamic panel data models. We find that finance and trade reinforced each other before 1930, but that these effects did not persist after the Second World War. Financial development has positive effects on growth throughout the sample period, while trade affects growth strongly and independently after 1945. We attribute the rising importance of trade in explaining growth to major post-World War II changes in tariffs and quantity restrictions associated with the GATT, the establishment of the European Common Market, and the gradual elimination of capital controls after 1973. The findings are robust to the use of 'deep' fundamentals such as legal origin and indicators of the political environment as instruments for financial development and trade. Financial development, however, is more closely linked to these fundamentals than trade.

Suggested Citation

Bordo, Michael D. and Rousseau, Peter L., Historical Evidence on the Finance-Trade-Growth Nexus (May 2011). NBER Working Paper No. w17024. Available at SSRN: https://ssrn.com/abstract=1833161

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter L. Rousseau

Vanderbilt University - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-343-2466 (Phone)
615-343-8495 (Fax)

HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

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