Does Trade Openness Affect Long Run Growth? Cointegration, Causality and Forecast Error Variance Decomposition Tests for Pakistan

The study investigates effect of trade openness on economic growth in the long run. We apply the ARDL bounds testing approach to test for a long run relationship and the augmented production function by incorporating financial development as an additional determinant of economic growth using the framework of Mankiw (1992). The results confirm cointegration among the series. In long run, trade openness promotes economic growth. The growth-led-trade hypothesis is vindicated by VECM Granger causality test. The causality is also checked by using the innovative accounting approach.