A Dynamic Causality Relation Between Financial Development, Trade Openness and Economic Growth: A Comparison Between Iran and Norway

Economic growth is one of the main macroeconomic goals of most countries. It is therefore, of paramount importance to recognize the major factors that influence it. Financial development and trade openness are usually considered as two significant factors that affect economic growth in various ways. Using a vector error correction model (VECM), this study investigates the causality relationship between financial development, trade openness and economic growth in two major oil producing countries, Iran and Norway. The study period for Iran is 1967-2009, and for Norway is 1967-2006.The ratio of liquidity to GDP and the ratio of bank credit to the private sector to GDP have been used as two financial development indices. The trade openness and economic growth have been illustrated using trade intensity index and the GDP per capita. Findings of the study indicate that financial development and trade openness are both significant cause of economic growth in Iran in the short run. There is also a bi-directional causality between both indicators of financial development and economic growth in the long run. In Norwegian economy it is indicated that there is a significant causal relationship between bank credit to the private sector and economic growth in the short-term, and there also is a bi-directional causality between bank credit to the private sector and trade intensity in Norway in the long- term. Therefore, it can be concluded that according to the findings of this study, practically there is the supply side view in Iran, while there is the demand side view in Norway.