March 20, 2019
This study revisits the growth-finance nexus using a new econometric approach and unique data set. In particular by employing the smooth transition framework and annual time series data for Brazil from 1890 to 2003, we attempt to address on the one side, what is the relationship between financial development, trade openness, political instability and economic growth and, on the other, how it changes over time. The main finding is that financial development has a mixed positive and negative time-varying impact on economic growth, which significantly depends on jointly estimated trade openness thresholds. Moreover our estimates highlight a positive impact of trade openness on growth but with interesting variation regarding their size and power, whereas the effect of political instability (both formal and informal) on growth is mainly negative. We also find that changes between regimes tend not to be smooth. Finally, our estimates show that in 57% of the years in which financial development has a below the mean effect, we find that trade openness experiences a substantial above the mean change.
J.E.L classification codes: C14; O40; E23; D72
Keywords:Economic growth; financial development; political instability; smooth transition models; trade openness