Abstract:

This paper examines cointegration relationships between economic growth, financial development and trade openness in emerging markets in the presence of structural breaks. The empirical analysis includes 21 emerging countries for 1995-2013, on a quarterly basis. The paper employs Perron and Yabu (2009) test in order to test for structural changes in the deterministic components of variables in use. The paper applies the Kejriwal and Perron (2008,2010) structural break test as well to determine the presence of structural breaks in estimated growth equation and to examine the parameters of the model. In order to test the cointegration relationships of series, three different cointegration techniques were applied to the data. First, the Gregory and Hansen (1996) cointegration test which allows for one structural shift; then, for cases where two breaks were detected, the Hatemi-J (2008) cointegration test was employed. Finally, for countries where more than two breaks are detected, the Maki (2012) cointegration test was applied, which allows for an unknown number of breaks. The empirical results of the paper indicate a stronger effect of trade openness on economic growth compared to the financial development impact when structural breaks are considered.a

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