Bound Testing Approach for Cointegration and Causality Between Financial Development, Trade Openness and Economic Growth in Bulgaria

The purpose of this study is to examine the relationship between financial development, trade openness and economic growth in Bulgaria using cointegration analysis and Granger causality technique. The bounds testing approach to cointegration is used to establish the existence of long-run relationship between financial development, trade openness and economic growth. An augmented form of Granger causality analysis is implemented to identify the direction of causality among the variables both in the short run and the long run. The results from Granger causality tests based on multivariate error-correction model suggest unidirectional causation from financial development and trade openness to economic growth, as well as unidirectional causation from financial development and economic growth to trade openness in the long run. In the short run, a bidirectional causality between financial development and trade openness and a unidirectional causality running from economic growth to financial development is observed at 1% significance level