Financial Development and Trade in Iran: A Causality Issue by Using Markov Switching Model
Subject Areas :Mohammad Rasti 1 , Mohsen Mehrara 2 *
1 - PhD Student
2 -
Keywords: Keywords: Financial Development, Trade, Markov Switching, Causality.,
Abstract :
Mohammad Rasti Mohsen Mehrara Abstract Regarding the importance of financial development and trade international, this article examines the non linear causal relationship between trade openness and financial development in Iran economy. Thus, two approaches in this regard including supply leading (the positive effect of financial development on trade) and demand following (the positive effect of trade on financial development) are examineded in the article. Based on the probable variety of structural changes, the Markov Switching model and the causality test in this model for the period of 1961 to 2022 are employed for the examination of non linear relationship between financial development and trade. Obtained results in this article indicate that there is demand following or a causal direction from trade openness to financial development in Iran economy in one regim (which includes 88 percent of the years). On the contrary, there is supply leading or a causal direction from financial development to trade openness in other regim (which includes only 12 percent of the years). In fact; the financial sector in Iran economy has usually affected a passive role on trade changes. Therefore; it is necessary to be done the fundamental improvement in financial sector, so that it would more promote trade sector in future.
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