Relation between Trade in Financial Services and Economic Growth in BRICS Economies: Cointegration and Causality Approach

Trade in financial services (TIFS) has a very important role in channelling investments into most productive uses, and therefore promoting growth. This article examines the relation between TIFS and economic growth (real gross domestic product, RGDP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, for the period 1990-2012. We have used Pedroni's panel cointegration approach to establish a long-run relationship between TIFS and economic growth. The results suggest that a causal relationship exists between the TIFS and economic growth of the BRICS economies. Given the variables are cointegrated, Granger causality analysis was undertaken using vector error correction mode (VECM) and vector autoregression (VAR) procedures, the results of which reveal both short-run and long-run uni-directional causalities running from TIFS to RGDP.