Our results provide little support to the view that finance is a leading sector in the process of economic development. The relationship between financial markets and economic growth has been a subject of great interest and debate among economists for so many years that even up to date researches are still contacting research on this subject. To the best knowledge of the authors, this is the only comprehensive study that takes into account financial development, in the energy growth nexus for tunisia and. The effects of financial repression on economic growth in kenya. Further, wachtel and rousseau 1995 stated that financial development does grangercauses growth. Does financial development granger cause economic growth. Majid kulliyyah of economic and management sciences, international islamic university malaysia iium, p. Sep 01, 2008 the causa lity between financial development and economic growth has long been one of the most wellknown and contentious issues in academic circle. Finally, i test the hypothesis that the influence of financial sector development differs as nonlinear effects when the sample is separated into groups based on initial income level. The purpose of this paper is to examine the relationship between financial development and economic growth for five major emerging economies. To investigate longrun causal linkages between stock market development and economic growth the englegranger causality and ml tests are applied. We also observe that financial depth causes industrial growth and causality runs in both directions between bank credit and industrial growth.
This paper conducts causality tests between financial development and real gdp using recently developed time series techniques. H1 the relationship between financial sector development stability and economic growth is nonlinear. Financial development and economic growth hkust business. Kenyan context economic growth was measured by gdp growth and financial repression as a coefficients of interest rate ceilings, broad money, high liquidity reserve, and government credit uptake. Schumpeter 1 912, in his effort to analyse the importance of technological.
Does financial development intensify energy consumption in. Later in the 60s70s goldsmith 1969, mckinnon 1973, shaw. The influence and effects of financial development on. Also, king and levine 1993a find that financial development is not the outcome of economic growth, rather finance leads to growth. Financial development and economic growth in ghana. Financial development, productivity, and economic growth. The result indicates that economic growth grangercauses domestic saving. The same applies to indicators of the efficiency and competitiveness of financial institutions. The increase in output per capita in economic theory is expressed as economic growth, without which no economic development, but does not have any economic growth to be a function of economic development. According to chtioui and boujelbene 2007, financial development causes economic growth in tunisia which may further causes more energy consumption. A good measurement of financial development is crucial to assess the development of the financial sector and understand the impact of financial development on economic growth and poverty reduction. However, economists views on the role of finance in economic development have not always been unanimous.
Pdf does financial development cause economic growth. However, the question of whether financial development preceded economic growth or vice versahas been debated in the historical literature on economic growth and finance. Dec 01, 1996 the simplest one is the case where financial development follows economic growth, as a result of increased demand for financial services. View of financial liberalization, economic growth, stability. Financial skill plays a role in most theories of persistent inequality. Eng, 2006, does financial development cause economic growth. The dynamic of financial development, imports, foreign direct investment and economic growth. Brazil, russia, india, china and south brics during 1993 to 2014 using banking sector and stock market development indicators. Thus, a careful analysis of the sources of financial development can provide additional evidence which is particularly important for policy makers in this region. Does financial development induce economic growth in uae. These results have implications for energy demand, economic growth and greenhouse gas emissions for the saudi arabian economy in particular and other asian emerging economies in general.
Research that supports this argument include ahmed and ansari 1998, who investigated the relationship between financial development and economic growth of three major southasian countries. We find that financial development stimulates economic growth. Lancaster university management school working paper. The costs of acquiring information, enforcing contracts, and making transactions cre. Pdf does financial development cause economic growth in. To the best knowledge of the authors, this is the only comprehensive study that takes into account financial development, in the energy growth. A developed financial system offers higher returns with lower risk adnan, 2011. As hypothesized by schumpeter 1934 and supported by king and levine 1993 with numerous papers thereafter, the varying level of development of financial systems affects economic growth. Previous research conducted focusing on the latin american region found support for both a negative and a positive impact of financial development on economic growth. On the relationship between financial development and economic growth, mckinnons and shaws analyses of financial repression as well as the conditionality of international financial institutions, such as the international monetary fund and the world bank prompted a number of. But under different conditions, similar rates of growth can have very different effects on poverty, the employment prospects of the poor and broader indicators of human development.
Financial sector development in developing countries and emerging markets is part of the private sector development strategy to stimulate economic growth and reduce poverty. I reject the null that financial development lfd2 does not cause granger cause real export. Timeseries evidence from 16 countries, keele department of economics discussion papers 19952001 95, department of economics, keele university. Can stock market development boost economic growth. Does financial development cause economic growth in the asean4 countries dr. The financial sector is the set of institutions, instruments, and markets. It promotes economic growth through capital accumulation and technological advancement by boosting savings rate, delivering information about investment, optimizing the allocation of capital, mobilizing and pooling savings, and. How does foreign direct investment promote economic growth. The role of the financial sector in economic growth. In the earlier literature, there were significant disagreements on the finance growth nexus. Financial development, economic growth, natural resources, angola.
As hypothesized by schumpeter 1934 and supported by king and levine 1993 with numerous papers thereafter, the varying level of development of financial systems affects economic growth differentials among countries. The consequence reveals that economic growth granger causes native reserves. Does economic growth and financial development spur energy. A number of methodologies and various sample periods are employed to examine this relationship. In practice, however, it is difficult to measure financial development as it is a vast concept and has several dimensions. Zaka and manadou 2010 also propose the stages of development.
The dynamic interactions between the growth of real gross domestic product and indicators. Adb economics working paper series asian development bank. Panel data analysis of financial development, trade. In addition, i test the hypothesis that causality leads from financial sector development to economic growth. For instance, questions were often raised over the nature of causality. Financial development and economic growth nexus in nigeria. Financial development and economic growth in developing asia. Given the links between the functioning of the financial system and economic growth, designing optimal financial sector policies is critically important. The impact of the financial system on economic growth in. On the relationship between financial development and economic growth, mckinnons and shaws analyses of financial repression as well as the conditionality of international financial institutions, such as the international monetary fund and the world bank prompted a number of reforms in various countries. In early stage of economic development, finance causes growth by inducing. We find, however, considerable evidence of bidirectionality and some evidence of reverse causation. Jones stanford gsb, stanford, ca, united states nber, cambridge, ma, united states contents 1. The important role of financial development in economic growth is evidenced by empirical and theoretical research.
Financial sector development can help with the growth of small and medium sized enterprises smes by providing them with access to finance. The link between financial development and economic growth has been largely discussed but a consensus on a positive and significant effect has been agreed amongst researchers. They play a major role in economic development particularly in emerging economies. Economists have commonly argued that financial repression prevents the efficient allocation of capital and thereby impairs economic growth. Without ignoring the weaknesses of existing work and the absence of complete una. There are ample evidence suggesting that financial sector development plays a significant role in economic development. The impact of the financial system on economic growth in the. This thesis is based on three empirical essays in financial development and economic growth. The results from the study suggests that financial development alone is insufficient in stimulating the level of productive investment required to sustain long term economic growth. Mar 30, 2016 the following three research hypotheses are tested. This result runs contrary to the existing conclusion that a stateruled banking. Financial development, bank efficiency and economic growth. We use these banking laws to assess the findings of a large recent literature that has argued that financial development contributes to economic growth. We use quarterly data from 19 oecd countries and china, and use total credit and interest spread as indicators of financial development.
Lancaster university management school working paper 2004045. Evaluate the relationship between financial development and economic growth using a time. However, the groundbreaking study of mckinnon 1973 and shaw 1973 kicked off the debate on the relationship between growth and financial institutions. Bader and qarn 2008 scrutinize the contributory correlation between financial development and economic growth in egypt during the era 19602001 by employing a trivariate var structure. The links between the functioning of the financial system and economic growth motivate research into the legal, regulatory, and policy determinants of financial development. Jun 27, 2003 recent economic literature has documented that financial development is associated with higher economic growth. According to supplyleading argument, the effect runs from financial development to economic growth alnaif, 2012. Based on the ardl models, the study documents a longrun equilibrium between economic growth, finance depth, share of investment and inflation. For example, when financial development is measured by the money to income ratio the saibu, nwosa, and agbeluyi, 2011 examined effects of direction of causality runs from financial development to financial development and foreign direct investment on economic growth, but when the bank deposits, private credit economic growth in nigeria. The effect of interest rate reforms on financial development is examined using a financial deepening model, and the causal relationship between financial development and economic growth is.
As countries become highly developed, the share of the banking system in the assets of the. Using a four variable var model applying on data collected from taiwan between the period. The objective of this study is to examine the determinants of financial. Does financial development cause private investment. The causality issue between financial development and economic growth takes on a new meaning in countries like korea and japan in east asia. It also includes the legal and regulatory framework that permit transactions to be made through the extension of credit.
Financial development and economic growth in a natural. This article examines whether financial development has caused economic growth in india since 1996. Their results supported the hypothesis that accounting policies, which reinforce creditor rights, will promote financial development and lead to economic growth. H2 an excessively large size of the financial system does not lead to more rapid economic growth. The dynamic interactions between the growth of real gross domestic product and indicators of fi. It is found that financial development has a strong positive impact over economic growth. The first essay, investigated in the third chapter, the effect of financial development on economic growth in the context of saudi arabia, an oilrich economy. Table 9 reports the results of granger causality among the variables. Does stock market development cause economic growth. This paper studies the effect of statelevel banking regulation on financial development and on components of statelevel growth in the united states from 1900 to 1940. Apr 12, 2018 where g is the value of growth indicator per capita gdp growth, fi is the value if the ith financial development indicators access, depth, and stability, and xj is the value of the jth control factors associated with economic growth trade, school enrollment, government consumption, and gdp constant. On the other hand, financial development does not seem to have a significant role in economic growth in angola. The end result of increased specialization and innovation is faster economic growth.
In measuring financial development, however, researchers often do not account sufficiently for international trade in financial services. Financial development starts with the banking system and depends on the diffusion of scriptural money, which the banking system provides. However, economic growth causes financial development but not vice versa in the sample of all 18 latin america countries. Does financial development influence economic growth in india. This view was originally put forward by joan robinson, who argued that where enterprise leads finance follows robinson, 1952, p. A number of recent empirical studies have reported a nonlinear relationship between financial development and economic growth in developed and developing. The relation between financial development and economic growth is much debated. The result showed that there was a long run relationship between financial development and economic growth in the selected countries in subsaharan africa.
Early theoretical discussions of the relationship between financial development and economic growth, by bagehot 1873 and schumpeter 1912 recognized the role of financial intermediaries in allocation of resources to the most effective producers levine, 1997. Smes are typically labor intensive and create more jobs than do large firms. In this paper another attempt has been made to investigate the nonstationarity in the. Capital use improves domestic production and hence economic growth. In this paper the principal purpose has been made to investigate the causal relationship between stock market development and economic growth in bangladesh. Specifically, the study intends to examine whether the activities of the money market do really have an impact on economic growth and development in nigeria. Strong economic growth therefore advances human development, which, in turn, promotes economic growth.
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