A VECM Approach to the Financial Development, International Trade and Economic Growth in China After Economic Reform

Abstract

This paper investigates the relationship between the financial development, international trade and economic growth for the People’s Republic of China. Annual time series data are used from 1982 to 2014. The study employs the Johansen cointegration and the vector error correction models (VECM) to examine the causal relationship among the variables. The stationary properties of the variables and the order of integration are tested using the Phillips-Perron (PP) test. All the variables are found to be cointegrated meaning that there existence a long-run association. Johansen cointegration results show that there exist one cointegrating vector among economic growth, financial development and international trade in China. The results of VECM confirm the long-run relation to the variables. Financial development is the drivers of economic growth in short and long-run in China.

Keywords: Economic Growth, Financial Development, Trade, Cointegration, VECM