The Nexus between Financial Development and Exports Performance: A Re-Assessment with the Structural Gravity Model

Abstract

The aim of this paper is to re-examine the relationship between financial development and international trade within the structural gravity model. Unlike the previous literature, we implement an identification strategy that considers intra-national trade flows in addition to international trade data in order to deal with the issues of perfect collinearity and the multilateral resistances terms (MRTs). Using a sample of 64 countries and two data frameworks (cross-sectional and panel) and applying the OLS/2SLS estimator and the PPMLHDFE estimator, our findings support the promoting effect of financial indicators on exports of all manufacturing goods relative to domestic trade. This performance is disproportionately higher for final goods than intermediate inputs. Importantly, this research demonstrates the existence of the heterogeneous direct impact of financial development on international trade depending on the level of economic development and across industries.