Financial Development, Trade Openness and Economic Growth: Evidence from Sultanate of Oman (1972-2012)

Abstract

There is a huge debate on the impact of financial development and trade openness on the economic growth. Accordingly, this study investigated the role of financial development, trade openness on economic growth in a small and open country i.e., Sultanate of Oman during the period 1972-2012. We apply the recently developed econometric techniques: namely the unit root tests for stationarity, Johansen and Juselius (JJ) for cointegration in VAR framework and Granger causality test for causal relationships in addition, variance decomposition analyses (VDC) based on VAR results is computed in order to address the question of causality between trade openness, financial development and economic growth beyond the selected time span. The Granger causality test indicates unidirectional causality from economic growth to financial development, while empirical results derived from VDCs show that trade openness shock is the most important source of shock to GDP and financial development. Indicating unidirectional causality running from trade openness to the other two series. Shock to trade openness is important sources of variability for its own at first, but this self-effect diminishes in a very small portion. Our finding indicates that economic policies aimed at trade openness have a statistically significant impact on financial development and economic growth.

Keywords: Financial Development, Trade Openness, Economic Growth, VAR, Variance Decomposition, Impulse Response Function, Sultanate of Oman