Trade, Investment and Growth: Nexus, Analysis and Prognosis
Posted: 9 Sep 2002
This paper looks at the patterns of causation between income, export, import, and investment growth for 39 developing countries. In addition to presenting findings based on panels consisting of all 39 countries, we also examine each country individually in order to allow for richer heterogeneity across countries. Our approach is essentially to apply model selection techniques which are based on ex-ante predictive ability criteria to identify the best model for each country. This allows us to shed new light on at least two issues. First, we look at the incidence of causation and reverse causation between various economic variables which are commonly believed to lead economic growth and find that there is less reverse causation from income to these variables than previously suggested by the literature. Second, we construct an index of global business cycle conditions. We find, as expected, that countries with high trade exposure, growth rates, and investment rates tend to gain in predictive ability from the addition of such a variable.
Keywords: reverse causation, exports, global business conditions, growth, investment
JEL Classification: F43, O47
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