Impact of Financial Development on International Trade in ASEAN-6 Countries: A Bayesian Approach

Abstract

The link between financial development and international trade has been analyzed in many studies, but the results are conflicting. Moreover, the previous studies have been concentrated on developed and developing economies outside the ASEAN community that have achieved a high degree of trade openness along with a rapidly developing financial system in recent decades. Here arises a question whether the mentioned relationship exists in these countries. Also, most of earlier studies applied outdated frequentist methods, which cannot provide a straightforward and intuitive probabilistic interpretation of results as does Bayesian analysis. For these reasons, the paper aims to analyze the impact of financial development on international trade within a Bayesian approach based on a dataset of the ASEAN-6 countries between 2008 and 2018. The results show that financial development, market capitalization to GDP, and the exchange rate have a strong positive effect on international trade, while, interestingly, GDP per capita has only a moderate positive effect.