Is there a non-linear relationship between trade and growth? A panel threshold analysis for Central and Eastern European countries

Abstract

It is suggested that international trade has a positive effect on the growth rate of economies. Although a vast literature has illustrated that open or more liberalised economies grow faster, the specific factors that promote this process have only recently begun to be investigated. We belive that there is a non-linear relationship between trade and growth, with the impact depending on a number of macroeconomic factors, i.e. the magnitude and even the direction of the effect of trade on economic performance might depend on other macroeconomic variables. Within this framework, our study aims to investigate the possible non-linearity in the trade-growth relationship, with a special focus on the financial deepening level for the selected Central and Eastern European (CEE) countries. Unlike the existing empirical literature on trade-growth nexus for the CEE economies, we utilise threshold regression techniques, where we allow the size and direction of the impact of trade on growth to differ between regimes, conditioning on the financial deepening level of these countries. Regarding credit growth and investment/credit ratio as thresholds, the countries in the upper regime benefit significantly more from trade.