Financial Deepening, Trade Openness and Growth: a Multivariate Cointegrated Analysis of the Complementary Effects. By Sergio GINEBRI*, Giacomo PETRIOLI** and Laura SABANI* Abstract A two-way causal relationship between growth and financial development is captured in a number of recent theoretical and empirical works. The basic idea is that the development of financial intermediaries allows the allocation of savings into productive investment opportunities with higher growth-generating potentials. In the same time wealthier economies can afford the costs associated to more sophisticated financial systems. As for the relationship between trade and growth, the effects of trade liberalisation on development seem to depend on the hypothesis about the particular engine of growth at work .In this paper, differently from the bulk of the existing literature, we take the view that financial markets and international good markets are interdependent and an isolated analysis of each market in its effects on growth would impede a clear identifications of the links between trade openness, financial deepening and economic growth. Our starting hypothesis is that potential gains to growth of trade liberalisation depend on the degree to which financial markets and international trade in goods act as complements. In order to verify empirically such hypothesis, in this paper the relationship between financial development, trade openness and economic growth is examined in a vector autoregressive (VAR) framework using two sample countries (Italy and Spain). By estimating and identifying the cointegrating vectors in those two countries, we ascertained the existence of a complementary relationship between financial development and trade openness. Furthermore, by the identification of a structural VAR and the analysis of the Impulse Response Functions, we were able to detect the complementary relation not only in the long period but also in the short-run. In effect, when a positive exogenous shock is given to trade openness, the financial system receives an impulse to grow as well. This means that trade liberalisation not only may encourage growth directly but also could have an “indirect“ effect by fostering financial development with a growth effect of its own. • *Università degli Studi di Roma “La Sapienza” , Dipartimento di Economia Pubblica, e CIDEI • ** Università di Venezia “Ca’ Foscari” , Master Program Keywords: endogenous growth, trade openness, financial development, multivariate cointegration analysis. E-mail: ginebri@dep.eco.uniroma1.it, gpetrioli@katamail.com, sabani@dep.eco.uniroma1.it.

Financial Deepening, Trade Openness and Growth: a Multivariate Cointegrated Analysis of the Complementary Effects. 1. Introduction

Over the last decade much theoretical and empirical research has been directed to achieve a better

comprehension of the effects on welfare levels and rates of GDP growth of trade openness and of

financial development and integration1.

Theoretically the role of global linkages and of financial depth in promoting economic development

cannot be properly explained in the context of the standard neoclassical model of growth (Solow

,1965). According to this model technological progress, that is not explained but exogenously

assumed, is the unique factor driving growth in the long run

Endogenous growth models provide a more rigorous and convincing conceptual framework for

analysing how international trade and capital market development and integration promote growth.

First of all by introducing increasing return to scale of physical capital and/or human capital

accumulation2 into an otherwise neoclassical framework, they show how an economy can sustain

indefinite growth in per capita income even in the absence of technological progress ( Rebelo ,1991;

Lucas,1988; Azariadis and Drazen,1990). Thus, it becomes theoretically possible to shed light on

the determinants of long run growth by looking at the role of trade openness and financial

development in affecting the process of accumulation of reproducible factors.

Focusing the attention on human capital accumulation3, it is possible to think that marginal benefits

of the investment in human capital might be increased by demand expansion through foreign market

access (scale effects) and that the inflow of new ideas through trade stimulates investment in

human capital by increasing its efficiency (Lucas, 1993). As for the role of efficient financial

markets, De Gregorio (1996) stresses the fact that, by providing liquidity, they loosen borrowing

1 Empirically a positive relationship between openness and economic growth has been supported by Balassa (1985), the World Bank (1987), Roubini and Sala Martin (1991) , and Harrison (1995), Frankel and Romer (1996). As for the relationship between financial development and growth compelling evidence of the existence of a positive link has been obtained by :Atje Jovanovic (1993) and King and Levine (1992,1993,1994) Jayaratne and Strahn (1996), Levine and Zervos (1996). The relationship between financial liberalisation and growth is much less clear: Diaz-Alejandro (1985) presents evidence showing that financial liberalisation has not always been growth promoting. 2 Human capital accumulation occurs in many ways: the most important distinction is human capital accumulation at school or on the job (learning by doing). 3 As for endogenous growth models based on accumulation of physical capital, it has been shown that trade affects growth because stimulates capital accumulation in the less capital abundant country (Fisher, 1995; Majamdura et,al., 1995). As for the role of financial markets, financial development helps to improve the efficiency of capital allocation promoting growth (see Pagano,1993, for a survey). But, according to many authors (see, for example, Lucas,1993) the main engine of growth is the accumulation of knowledge and human capital through schooling or learning by doing , so we focus on such factors.

constraints and help investment in schooling. Differently, Cooley and Smith (1995) argue that

efficient financial markets might promote entry in entrepreneurial activity and then human capital

accumulation through learning by doing.

A second strand of this new growth theory (Romer, 1990; Grossman Helpman, 1991 and Rivera-

Batiz Romer, 1991) has extended the neoclassical model by incorporating market-driven

innovations and thus allowing for endogenously driven growth. In these models the engine of

growth is technological progress whose level is decided by the investment in R&D activity.

The analysis of the channels through which trade openness and financial development affect

investment in innovating activities will thus give important insights on growth. The efficiency of

technological knowledge, for example, can be seen as an increasing function of openness due to

knowledge spillovers from foreign countries (Grossman Helpman, 1991). Moreover, demand

expansion through trade liberalisation encourages the development of innovations and thus the

R&D activity (Romer ,1990). Finally, as far as R&D is a risky activity it becomes possible to

evaluate the effects on the investment in new and highly risky projects of the presence of efficient

and possibly fully integrated financial markets: effective financial institutions allow to improve the

process of collecting information on the efficiency of investment projects and /or entrepreneurs’

ability (Greenwood Jovanovic, 1990) and permit, via financial integration, a more adequate

diversification of risk (Saint Paul, 1992; Feeney,1994) promoting investment into high yield,

highly risky activities.

Against this background, an important point must be stressed: the bulk of this “new growth”

literature looks at the growth effects of trade liberalisation and development and/or integration of

financial markets separately. However, in our opinion, an isolated analysis of each market in its

effects on growth might prevent a clear understanding of the process of economic development by

overlooking the analysis of the multicausal linkages among trade openness, financial development

and economic growth. In this respect an integrated analysis is needed.

Multicausal linkages among trade, economic growth and financial development emerge from the

evidence that not only financial development positively affects growth but the extent of financial

activity itself depends positively on growth4. The reason is that the cost of financial services carries

a fix component that falls with the volume of financial transactions. As a consequence financial

markets will develop only when a threshold level of income is reached. But, if financial outcomes

4 See Luintel and Kahn,1999, for an empirical analysis; Bencivenga and Smith (1998), Cooley and Smith (1995), Bose and Cothren (1996) Sussman (1993) Sussman and Zeira (1993) for theoretical works.

are endogenous to an economy there is a question of how greater trade integration affects the state

of financial development itself .

Theoretically the question has not been much explored. An exception is Blackburn and Hung

(1998): they employ the well-known endogenous growth model of Romer (1990) in which growth

is driven by horizontal innovation in intermediate goods. The model embodies a scale effect: by

expanding the markets for new goods, through trade liberalisation, for example, horizontal

innovations in intermediate goods is encouraged. This means that more firms enter the research

sector and more firms look for external financing of risky and independent research projects. This,

in turn, helps financial intermediaries to better diversify their portfolios and decreases their default

probability reducing the agency cost related to the need for depositors to monitor the intermediary

portfolio. The reduction in the agency cost of financial intermediation contributes to higher growth

since firms in the research sector start operating at positive profits and this encourages new firms to

enter the market increasing the rate at which new process are invented. This in an indirect “financial

market” gain from trade: through scale effects trade liberalisation can accelerate innovations and the

development of financial markets. Hence, there exists a complementary relationship between trade

and financial development .

Feeney (1994a, b) tackles a related question in that she asks whether or not integration in financial

markets complements trade. She argues that in an open economy the availability of international

financial markets for risk-sharing eliminates uncertainty in aggregate income, due to sector specific

productivity shocks, and allows product specialization in the direction indicated by comparative

advantage. A higher degree of specialization will be associated to financial integration causing the

expected volume of trade to rise. This complementary relationship, however, depends on the initial

(autarchic) structure of production and it is possible to identify situations in which international

financial assets and goods markets behave instead as substitutes5.

The object of this paper is to verify empirically the existence of the complementary relationship

between trade openness and the extent of financial activity6. Focusing the attention on the Italian

and the Spanish economies we test such hypothesis by adopting an aggregate time series approach

covering the period 1977-1994 for Italy and 1971-96 for Spain. We employ a multivariate

cointegrated model and by the identification of a structural VAR and the analysis of the Impulse Response

Functions, we are able to detect the complementary relation not only in the long period but also in the short-

run. Moreover our result seem to point towards the evidence of a direct nexus between trade and the extent

of financial activity. More precisely, while in the Blackburn –Hung model trade affects the extent of

5 Ambiguous or negative links between financial liberalisation and growth are also found in theoretical works by Cooley and Smith (1995), Deveraux and Smith (1992) Obstfeld (1994) and Boyd and Smith (1997).

financial activity through its effect on growth, the results we obtained show the existence of a

direct positive link.

The rest of the paper is organised as follows. Section 2 sets out the theoretical background on which

we found the empirical analysis; empirical results are presented in section 3 and finally in section 4

results are summarised and policy implications discussed.

2. Theoretical background.

In order to recognize multicausal linkages among trade, financial deepening and economic growth

we base our empirical analysis on a simplified version of the paper by Blackburn and Hung (1998)

(B-H, hereafter) and on an open economy version of the paper by Cooley and Smith (1995).

The B-H model is a more complex version of Romer (1990): they add financial markets by

hypothesising that the design producers need external finance to start their business.

There are two production sectors : the final good and the producers goods sector.

Let us refer to the following production function of the final good

ββ ∑

=

−=tA

jtjtyt kLy

1,

1,

where j indexes the different types of capital goods that can be used in production and At captures

the number of capital goods that have been invented as of time t. Ly,t is the amount of labour

employed in the final sector.

In each period there are Nt firms engaged in research activity. Once developed a blueprint (or

design) shows how to produce the new capital good: one unit of the final good at t gives one unit of

the new capital good at t+1 , kj,t+1 7

.

The success probability of a research project is assumed to be positively related to the stock of

knowledge accumulated At and to the amount of labour employed, so the expected flow of new

designs can be written as:

))((1 ttAttt NLAAA ϑ=−+

The steady state equilibrium can be identified in terms of the constant ratios

t

t

MN

n =

tAt LMe ,=

6 We do not tackle the question of the relation between financial liberalisation and trade because of the ambiguous theoretical results

where the common constant growth rate of variables is given by

neg )(ϑ=

Growth occurs through the increasing variety of capital goods associated with an increasing number

of firms engaged in research and development.

Now turn to the issue of trade liberalisation. Consider two economies initially isolated and

symmetric. Assume that the designs for these inputs are non tradable so that the production takes

place in the original country. Assume that there is no imitation and no redundancy in research. The

number of intermediate goods available to firms in each country is now 2At. Designers begin to

operate at positive expected profits given the reduction in the labour cost of developing a new

design. This encourages new firms to enter research sector intensifying the rate of innovation.

Now let us consider the financial sector. Each designer has got zero wealth and must raise external

finance. We assume indirect lending through a financial intermediary. The cost of delegation is

represented by the cost of monitoring the intermediary operate. This cost decreases as the

probability of bank failure decreases. It is possible to show that the probability of failure tends to

zero as the number of independent projects financed by the intermediary grows without bound.

Since the direct effect of trade is increasing the number of designers, this means that the delegated

monitoring cost will be reduced. This, in turn, reduces the fixed cost in research due to the need to

find external finance, promoting growth by encouraging new firms to enter the research sector.

In sum, the B-H model predicts that trade has got a positive effect on growth by encouraging

product development, then product development fosters financial deepening through a reduction in

the agency cost of external financing. Therefore, trade affects the extent of financial activity

indirectly through its effect on growth .

We believe, however, that the existence of such “indirect” nexus does not exclude the presence of a

direct link between trade and financial development as we argue in the following basing our

discussion on an open economy version of the model by Cooley and Smith (1995).

In an open economy human capital accumulation is influenced by the level of knowledge

accumulated not only internally but also in the rest of the world, due to the fact that the ideas

developed abroad spread internally through trade in commodities (Parente and Prescott,1991). Thus,

human capital accumulation can be represented by the following equation

[ ]θθγ )()( 1 EWhdtdh

tt −=

7 For simplicity we suppose that both the invention of the design (or blueprint) and the production of the new capital good take place in the same firm

where W (E) if the level of worldwide knowledge “imported” which is a function of the degree of

external openness E. In other words, trade increases the marginal benefits of the investment in

human capital since the efficiency of technology is increased by knowledge spillovers. If we intend

human capital accumulation as learning by doing we can conclude that trade encourages

entrepreneurial development since it is plausible to think that learning by doing is most significant

in young enterprises ( Cooley and Smith, 1995). To start their business young entrepreneurs need

external finance: we can argue, therefore, for the existence of a direct nexus between trade and the

extent of financial activity. This argument leads us to a further observation. According to the

Cooley and Smith (1995) model , even when financial markets are free to form (no fixed costs) it is

possible to observe equilibria without financial activity . This happens when the rate of return from

financial investment is too low. Therefore, by increasing the payoff to financing young

entrepreneurs, trade might foster the formation of active capital markets avoiding “low growth trap”

equilibria.

4. The results of the empirical analysis

The relationship between financial development, trade openness and economic growth is examined

in a vector autoregressive (VAR) framework. We focus our attention on two European countries

which have been interested to a process of economic integration with the rest of the world: Spain

and Italy. Our empirical analysis aims at shedding light on the relationship among three macro-

economic variables in each country: the level of real Gross domestic product (GDP), the level of

total credit to the private sector (CRED) and a measure of trade openness of the country,

represented by the ratio between the sum of exports and imports and GDP (TRADE)8. We first

present the results in the case of Italy.

Results on Italian data

We started the analysis on Italian data by estimating a Vector AutoRegressive system in five

variables. To the three variables previously mentioned, two other ones were added: the real

effective exchange rate (REER) and a measure of international trade openness, represented by the

ratio between the sum of exports and imports and the GDP in the whole OECD area (INTRADE)9.

Data are quarterly; estimation period goes from 1977:4 to 1994:3; following the evidence from

Hannan-Quinn’s and Schwartz’ information criteria only one lag was included in the estimated

system.

8 The source of all the data is OECD, Quarterly national accounts and Main economic indicators; the nominal level of total credit to the private sector was deflated by the consumer price index; all the variables in TRADE are at costant prices; both GDP and CRED are in logs. 9 The source of REER is FMI, International financial statistics; INTRADE has the same source and features of TRADE; REER is in logs.

Once estimated the VAR system the cointegration analysis was carried out and the Johansen’s

(1995) approach was followed10. The cointegration rank was established according to the trace test

(see table 1) and just one cointegrating vector was detected. The estimated long run relationship is

the following:

TRADE = 0.8816 INTRADE + 0.0793 CRED

Hence, we found empirical evidence on Italian data of the complementary relationship between

openness to international trade and development of financial system which we were looking for on

the basis of theoretical reasoning.

Italian GDP is not present in the cointegrating equation, but the null of hypothesis of weak

exogeneity of GDP is rejected. In other words, growth is affected by the long run relation between

international integration and development of the financial system, however the complementary

relationship is not directly affected by growth.

The exam of the impulse response functions (IRF) gives us the opportunity to have a better

understanding of the interrelations among growth, trade openness and development of financial

system. The simulation of the IRFs requires the identification of structural shocks, that is of

disturbances idiosyncratic to each endogenous variable in the estimated system but orthogonal

among them. Such identification was achieved by imposing arbitrary restrictions on the

contemporary links among the endogenous variables. We assumed that international trade openness

(INTRADE) and total credit to private sector (CRED) are affected in the short period, i.e. at each

time, only by their own, idiosyncratic random shocks. Italian trade openness(TRADE) is affected by

either its own random shock and by the shock to international trade openness. Similarly, the real

effective exchange rate (REER) is simultaneously influenced by its own random shock and by the

shock to Italian trade openness. Finally, all the random shocks in the system impinge on the short

run behaviour of Italian GDP.

The previously specified structure of contemporary links between the variables imply an over-

identification of the structural random shocks. Because of the presence of over-identification, the

assumed restrictions can be verified by a test. The test does not reject the assumed restrictions.

The IRFs make clear the complementary relationship between trade openness and development of

financial system (see Graph 1). An impulse given to international trade openness gives rise to an

increase in the domestic credit to private sector. The effect of the former on the latter is clear and

statistically significantly different from zero, as the 5 per cent confidence band shows. The reaction

of domestic credit is probably affected by the jump of domestic trade openness following the

10 The econometric program MALCOLM 2.2 by Rocco Mosconi was used.

impulse to international openness. Such reaction, however, it is not the consequence of the increase

of domestic product.

In effect, in response to the shock given to international openness, gross domestic product reacts as

expected and shows a jump. Such response could be alleged to cause the growth of domestic credit.

But, when a shock is given only to GDP, domestic credit does not show any significant reaction.

Therefore, the development of financial system is clearly and directly affected by international trade

openness.

As to the symmetric response of domestic trade openness to the development of financial system,

the IRFs show that TRADE jumps significantly up when a shock is given to CRED. However, the

response is significantly different from zero only at the very beginning. After two periods, the

simulated level of TRADE is higher than the baseline level but not significantly different from zero.

Results on Spanish data

The Vector AutoRegressive system estimated on Spanish data is formed only by our three key

variables: CRED, TRADE and GDP. Data are quarterly; estimation period goes from 1971:2 to

1996:2; following the evidence from Aikake’s, Hannan-Quinn’s and Schwartz’ information criteria

five lags were included in the estimated system.

The trace test for the determination of the cointegration rank detected the presence of one

cointegrating vector (see table 2). The estimated long run relationship is the following:

CRED = 0.5192 TRADE + 1.1826 GDP – 0.0023 TREND

Therefore, empirical evidence on the complementary relationship between openness to international

trade and development of financial system was found on the Spanish data as well. In the case of

Spain, the complementary relation is affected by the behaviour of GDP. An increase of trade

openness and total credit is associated in the long run to an increase of domestic product.

In order to identify the structural shocks and to analyse the IRFs, the same kind of constraints used

on Italian data were assumed. Both trade openness (TRADE) and total credit to private sector

(CRED) were supposed to be affected only by their own idiosyncratic shock. On the contrary, all

the random shocks in the system are assumed to affect the domestic product (GDP). The over-

identifying constraints were not rejected by the test procedure.

From the IRFs, the response of total credit to an increase of trade openness is again clear (see Graph

2). In the first nine quarters, such reaction is not statistically different from zero. From the tenth

quarter onwards, however, the reaction becomes statistically different from zero. The behaviour of

total credit is partially explained by the effect of trade openness on domestic product. When trade

openness increases, domestic product grows and this stimulates the growth of total credit. However,

this effect explains less than half of domestic credit’s reaction. The remaining part of the response is

explained by the direct effect of trade openness on credit.

Unlike the Italian case, no significant effect of a shock to total credit on trade openness is detected.

In effect, the null hypothesis of weak exogeneity comes out not to be rejected in the case of trade.

As in the case of Italy, empirical evidence points out that in the complementary relationship

between trade openness and development of financial system, the most remarkable link goes from

the former to the latter.

5. Conclusions

Our empirical analysis allowed us to detect a complementary relation between trade openness and

the development of financial system both on Italian and on Spanish data. The knowledge of this

association allows us to reach a better comprehension of the impact of trade liberalisation on

growth. In this sense, when both trade and financial development act as complement, trade

liberalisation not only may encourage growth directly but also could have an “indirect effect” by

fostering financial development with a growth effect of its own. This “indirect effect” might be

simply a consequence of growth, as suggested by much of the literature on the two-causal

relationship between financial development and growth, but, as our results suggest, could be due

also to the existence of a direct relationship between trade openness and financial activity.

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Table 1 - Trace Tests For The Cointegration Rank (r) in the estimated system on

Italian data

r Const. Trend Statistic | 50% 80% 90% 95% 97.5% 99% 0 m0 ab1 115.84 | 68.64 77.83 83.20 87.31 91.06 96.58 1 m0 ab1 62.09 | 47.17 54.80 59.14 62.99 66.25 70.05 2 m0 ab1 35.96 | 29.53 35.56 39.06 42.44 45.42 48.45 3 m0 ab1 16.19 | 15.59 20.19 22.76 25.32 27.75 30.45 4 m0 ab1 2.42 | 5.55 8.65 10.49 12.25 14.21 16.26 NOTE: THE HYPOTHESIS IS ACCEPTED WHEN CALC. VALUE < TAB. VALUE

Table 2 - Trace Tests For The Cointegration Rank (r) in the estimated system on

Spanish data r Const. Trend Statistic | 50% 80% 90% 95% 97.5% 99% 0 m0 ab1 51.73 | 29.53 35.56 39.06 42.44 45.42 48.45 1 m0 ab1 23.61 | 15.59 20.19 22.76 25.32 27.75 30.45 2 m0 ab1 5.73 | 5.55 8.65 10.49 12.25 14.21 16.26 NOTE: THE HYPOTHESIS IS ACCEPTED WHEN CALC. VALUE < TAB. VALUE

Graph 1 – Impulse Response Functions on Italian data

RESP. OF INTRADE TO INTRADESIZE= 5%

5 10 15 200.0000

0.0005

0.0010

0.0015

0.0020

0.0025

0.0030

RESP. OF CRED TO INTRADESIZE= 5%

5 10 15 200.0000

0.0025

0.0050

0.0075

0.0100

0.0125

0.0150

0.0175

0.0200

RESP. OF TRADE TO INTRADESIZE= 5%

5 10 15 200.000

0.001

0.002

0.003

0.004

0.005

0.006

RESP. OF REER TO INTRADESIZE= 5%

5 10 15 20-0.012

-0.010

-0.008

-0.006

-0.004

-0.002

0.000

0.002

0.004

0.006

RESP. OF GDP TO INTRADESIZE= 5%

5 10 15 20-0.0016

-0.0008

0.0000

0.0008

0.0016

0.0024

0.0032

0.0040

0.0048

0.0056

RESP. OF INTRADE TO CREDSIZE= 5%

5 10 15 20-0.00050

-0.00025

0.00000

0.00025

0.00050

0.00075

0.00100

0.00125

0.00150

RESP. OF CRED TO CREDSIZE= 5%

5 10 15 20-0.005

0.000

0.005

0.010

0.015

0.020

0.025

RESP. OF TRADE TO CREDSIZE= 5%

5 10 15 20-0.00040

0.00000

0.00040

0.00080

0.00120

0.00160

0.00200

0.00240

RESP. OF REER TO CREDSIZE= 5%

5 10 15 20-0.0128

-0.0112

-0.0096

-0.0080

-0.0064

-0.0048

-0.0032

-0.0016

0.0000

RESP. OF GDP TO CREDSIZE= 5%

5 10 15 20-0.0036

-0.0030

-0.0024

-0.0018

-0.0012

-0.0006

0.0000

0.0006

0.0012

RESP. OF INTRADE TO TRADESIZE= 5%

5 10 15 20-0.00125

-0.00100

-0.00075

-0.00050

-0.00025

0.00000

0.00025

0.00050

0.00075

0.00100

RESP. OF CRED TO TRADESIZE= 5%

5 10 15 20-0.0050

-0.0025

0.0000

0.0025

0.0050

0.0075

0.0100

RESP. OF TRADE TO TRADESIZE= 5%

5 10 15 20-0.002

0.000

0.002

0.004

0.006

0.008

RESP. OF REER TO TRADESIZE= 5%

5 10 15 20-0.004

-0.002

0.000

0.002

0.004

0.006

0.008

0.010

0.012

RESP. OF GDP TO TRADESIZE= 5%

5 10 15 20-0.002

-0.001

0.000

0.001

0.002

0.003

0.004

0.005

RESP. OF INTRADE TO REERSIZE= 5%

5 10 15 20-0.00175

-0.00150

-0.00125

-0.00100

-0.00075

-0.00050

-0.00025

0.00000

0.00025

0.00050

RESP. OF CRED TO REERSIZE= 5%

5 10 15 20-0.0100

-0.0075

-0.0050

-0.0025

0.0000

0.0025

0.0050

0.0075

0.0100

0.0125

RESP. OF TRADE TO REERSIZE= 5%

5 10 15 20-0.0020

-0.0015

-0.0010

-0.0005

0.0000

0.0005

0.0010

RESP. OF REER TO REERSIZE= 5%

5 10 15 20-0.010

-0.005

0.000

0.005

0.010

0.015

0.020

0.025

RESP. OF GDP TO REERSIZE= 5%

5 10 15 20-0.0032

-0.0024

-0.0016

-0.0008

-0.0000

0.0008

0.0016

0.0024

RESP. OF INTRADE TO GDPSIZE= 5%

5 10 15 20-0.00150

-0.00125

-0.00100

-0.00075

-0.00050

-0.00025

0.00000

0.00025

0.00050

0.00075

RESP. OF CRED TO GDPSIZE= 5%

5 10 15 20-0.0075

-0.0050

-0.0025

0.0000

0.0025

0.0050

0.0075

0.0100

RESP. OF TRADE TO GDPSIZE= 5%

5 10 15 20-0.0020

-0.0015

-0.0010

-0.0005

0.0000

0.0005

0.0010

RESP. OF REER TO GDP

SIZE= 5%

5 10 15 20-0.0025

0.0000

0.0025

0.0050

0.0075

0.0100

0.0125

0.0150

RESP. OF GDP TO GDP

SIZE= 5%

5 10 15 20-0.0016

-0.0008

0.0000

0.0008

0.0016

0.0024

0.0032

0.0040

0.0048

0.0056

Graph 2 – Impulse Response Functions on Spanish data

RESP. OF CRED TO CREDSIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.030

-0.024

-0.018

-0.012

-0.006

-0.000

0.006

0.012

0.018

RESP. OF TRADE TO CREDSIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.0075

-0.0050

-0.0025

0.0000

0.0025

0.0050

RESP. OF GDP TO CREDSIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.0150

-0.0125

-0.0100

-0.0075

-0.0050

-0.0025

0.0000

0.0025

RESP. OF CRED TO TRADESIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.0030

0.0000

0.0030

0.0060

0.0090

0.0120

0.0150

0.0180

0.0210

RESP. OF TRADE TO TRADESIZE= 5%

2 4 6 8 10 12 14 16 18 200.002

0.004

0.006

0.008

0.010

0.012

0.014

RESP. OF GDP TO TRADESIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.0050

-0.0025

0.0000

0.0025

0.0050

0.0075

0.0100

0.0125

RESP. OF CRED TO GDP

SIZE= 5%

2 4 6 8 10 12 14 16 18 200.000

0.005

0.010

0.015

0.020

0.025

0.030

RESP. OF TRADE TO GDP

SIZE= 5%

2 4 6 8 10 12 14 16 18 20-0.008

-0.006

-0.004

-0.002

0.000

0.002

0.004

RESP. OF GDP TO GDP

SIZE= 5%

2 4 6 8 10 12 14 16 18 200.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0.020