Investigation of the Dynamic Relationship between Trade Liberalization,Financial development and Economic Growth In Selected Countries Around the World (A New Approach to Financial Development Index)

the purpose of this paper is to empirically investigate the direction of causality between financial development, trade liberalization and economic growth in 130 countries including Iran between 2000 and 2017. Cointegration approach, panel vector error correction (PVECM) and Toda-Yamamoto-Dolado-Lutkepohl causality tests (TYDL) are used in this paper to investigate short - term and long-term causal factors. In order to create the Composite Financial Development index, we used the Principal Components method to present a novel approach. The results indicate that there is a long-term and strong bi - directional causality between all variables in high - income countries and there is a long-term causality in financial development and trade liberalization in form of reducing tariff and non-tariff barriers to economic growth in all groups. We also found that in high income countries, there is a short-term and strong causality in financial development to economic growth. As to study findings, the development of capital markets, the enhancement of their depth and efficiency, and the development of trade liberalization policies and stategies to increade economic growth in long run, recommended for middle income and low income countries. As a middle - income country, economic growth has always been an important objective in Iran. Thus , it seems necessary for country to deepen financial markets and institutions and increase the efficiency of financial markets to benefite from positive long- term effects of financial development on economic growth.