The Triangle of Financial Development, Economic Growth and International Trade in Iran: A Causation Analysis

This study investigates the validity of the demand-following, the supply-leading, the export-led growth and the import-led growth hypotheses and direction of causality between financial development and international trade in Iran. The Bounds Testing Approach to cointegration is conducted to establish the existence of a long-run relationship between these variables. An augmented form of Granger causality analysis and Toda and Yamamoto procedure is implemented to identify the existence and the direction of causality. The empirical findings confirm the demand-following hypothesis in short run. The export-led growth hypothesis and a unidirectional causation from financial development to import are also supported by the results.