Financial development and economic growth econstor. On the one hand, cross country and panel data studies find positive effects of financial development on output growth even after accounting for other. An alternate approach in exploring the causal link between. Results show that all the series were stationary at first difference i1. In fact, the majority of the previous studies on this subject have concentrated mainly on asia and latin america, leaving the eastern africa countries either very little coverage or none at all odhiambo, 2009. Previous studies examining the relationship between financial development and economic growth have involved a variety of methods. Using a panel of 66 developing countries for the period 19912005, authors show that an efficient banking system complements the positive effect of remittances on gdp growth. This paper presents a simple endogenous growth model to demonstrate the role of financial development in economic growth. The econometric methodology employed was the cointegration and granger causality test. Then i use time series annual data from 1978 to 2009 to set up a shortterm model and longterm model. The question is whether there is a causality and if so in what direction. Financial development and economic growth in india.
The relationship between financial development and economic growth is important and intriguing at the same time. According to these discussions, the nature of casualty between the two was established. Causal relationship between financial development and economic growth was examined in a study that presented a simple endogenous growth model to demonstrate the role of financial development in economic growth 2. Most empirical studies conclude that the former, together with a more efficient banking system, accelerates the latter levine, 1997, 2005. This paper aims to investigate the longrun relationship between financial development and economic growth using panel unit root and panel cointegration analysis in 16 selected lowincome. Relationship between remittance and economic growth in. Relationships between economic growth and human development. A growing body of work would push even most skeptics. The cointegrating vector showed that, rather than the banking sector, stock market development was more conducive to a higher rate of growth. The results of granger noncausality show that there is a unidirectional causality running from financial development to economic growth and bidirectional causality runs between economic growth. Causal relationship between financial development and economic growth in south africa article pdf available in applied econometrics and international development 151. 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. Pdf causal relationships between financial development. Financial development is measured by two variables.
Financial development and economic growth in the caricom. The term economic growth refers to the quantitative aspect of economic progress of a country. Levine argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive, firstorder relationship between financial development. This paper examined the causal relationship between financial development and economic growth in nigeria and south africa by employing co integration test, vecm and granger causality test using the data of annual time series for the period 1980 2014. The direction of causality between financial development.
According to paul baron, economic growth may be defined as an increase over time in per capita output of material goods. The causal relationship among financial development, trade. In other words, growth of gross national output or per capita output is an indicator of. Although many empirical studies have investigated the relationship between financial depth, defined as the level of development of financial markets, and economic growth, the results are ambiguous. Evidence from taiwan and japan chienchiang lee and swee yoong wong national chung hsing university and shih chien university this paper employs a threshold regression model to investigate the existence of inflation threshold effects in the relationship between financial development and. This implies that economic growth can stimulate financial deepening in taiwan in the high growth regime. Economic growth is measured as the per capita growth in real gdp. The results show that a threshold cointegration effect exists in relationship between financial deepening and economic growth. The aim of this paper is to reexamine the cointegrating and causal relationship between financial development and economic growth in the ecowas countries.
This paper evaluates the empirical relationship between the level of financial intermediary development and i economic growth, ii total factor. Nexus between foreign direct investment and economic. Stock market development and economic growth in india. The relationship between foreign direct investment fdi inflows and economic growth in host countries is a heavily debated issue. Empirically, a plethora of studies extant in the literature have investigated the relationship between financial depth and economic growth, albeit having. This study contributes to understanding the role of financial development on economic growth theoretically and empirically. There is even evidence that the level of financial development is a good predictor of future rates of economic growth, capital accumulation, and technological change. Levine argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive, firstorder relationship between financial development and economic growth. In the theoretical part of the paper, by developing a solowswan growth model augmented with financial markets in the tradition of wu, hou, and cheng 2010, we show that debt from credit markets and equity from stock markets are two long run determinants of gdp per. The relationship between financial deepening and economic.
While my analysis shows a positive relationship between financial development and economic growth, more research needs to be conducted in order to determine causality between the two. The relationship between economic growth and export which is an important component of international trade has taken the attention of many scholars. Estimating the causal relationship between financial. Tydl is based on an augmented var modeling and it is adjudged more robust to order of integration of the variables when compared with granger framework. Levine 1997b, 1998 as well as beck, levine and loayza 1999a examine this question. To do this, it assesses the conduct of market reforms which contribute to human development, identifies problems and challenges in the rural areas, outlines the emerging issues of habitat discusses the reforms required to strengthen the social infrastructure of health and education. The relationship between financial development, human. Understanding the causal relationship between financial. 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. The results obtained from the analysis confirmed a positive relationship between financial development and economic growth.
Using a fully balanced panel of 24 economies from 1983 to 20, the study shows that when imposing a linear relationship, the financial development and economic growth are negatively associated in the long run. Third, it extends the literature regarding the relationship between financial development and economic growth through a comparative approach on the face of the recent financial crisis in a group of countries that implement the same regulations for the financial sector. Investigating causal relationship between financial. The causal relationship between financial development and. Ever since schumpeter 1911, and more recently mckinnon 1973 and shaw 1973, the relationship between financial development and economic growth has been extensively studied. Three groups exist in the literature regarding the causal relationship between financial development and economic growth patrick 1966. Both theoretical and empirical evidence find a clear positive link between financial development and economic growth, thereby suggesting that policy makers should take into account the role of financial systems to sustain growth. The first hypothesis, called supplyleading response hypothesis, argues.
Another study tested the effects of population growth. The earliest known proponents of the notion that finance could be an engine of growth are schumpeter and opie 1934. Investigating the causal relationship between financial. Although the relationship between financial development and economic growth has received widespread attention in the modern history of economics, the conclusions have been far from conclusive. However, this evidence does not necessarily prove that financial development causes growth.
The objective of the study is to examine the applicability or. But in literature the testing of this hypothesis is rare for developing countries. Financial development is part of the private sector development strategy to stimulate economic growth and reduce poverty. An empirical analysis 3 addition, it also inquires about the causal relationship between them and direction of causality. There is a long debated issue weather there is a connection between financial development and economic growth. Economic development is the process focusing on both qualitative and quantitative growth of the economy. Patrick studied the causality between financial development and economic growth and argued that prosecution of demand or conduction of supply can be established. The dynamic relationship between financial development and. He used a multivariable causality test with data from 1950 to 2005 which. Although some studies have found evidence of the positive impact of fdi on economic growth, others have revealed the opposite result. It further explores the causal relationship between financial development. The hypothesis behind these models is that legal environment affect. Relationship between economic growth and economic development.
The granger causality test indicates that the causality runs from financial development to economic growth. The advocates of the first school of thoughts argued that financial development. The purpose of this study was to examine the causal relationship among financial development, trade openness and economic growth in nigeria for the period 19702005. It measures all the aspects which include people in a country become wealthier, healthier, better educated, and have greater access to good quality housing. The paper examines whether a longrun relationship between financial development and economic growth exists employing panel integration and cointegration techniques for a dynamic heterogeneous panel of 15 oecd and 50 nonoecd countries over the period 19752000. Our results suggest that the impact of four parameters of financial development differs depending. Todaro, economic development is a multi dimensional process involving major changes in social structures, popular attitudes and national institutions as well as the acceleration of economic growth, the reduction of inequality and the eradication of absolute poverty. There is even evidence that the level of financial development is a good predictor of future rates of economic growth, capital accumulation and technological change. Financial development and economic growth jrc publications. Moreover, the causality pattern showed that, whilst, in the longrun, there was a consistent. Moreover, cross country, case study, industry and firmlevel analyses document. By measuring financial sector development at the beginning of the period, in 1960, king and levine try to mitigate concerns about possible reverse causation between financial development and economic growth. The relationship between financial development and economic growth has been extensively analysed in the literature.
This study examines the relationship between financial development and economic growth. Although there is a twoway relationship, it is possible that fastergrowing countries tend to place more emphasis on financial development. Financial development, financial openness, and economic growth. The impact of financial development on economic growth.
Financial development, productivity, and economic growth. There is even evidence that the approach focuses on the ties between growth and the level of financial development is a good predictor of quality of the functions provided by the financial system. The purpose of this paper is to examine the relationship between financial development and economic growth. Financial development, financial openness, and economic growth this paper examines the importance of financial development and openness. This paper examines the question whether in transition economies the level of financial. Although research in the area of the relationship between financial development and economic growth abound both in advanced and developing countries, the direction of causality has not been resolved. Initially, there were two major schools of thoughts. Each relationship will be discussed in turn with empirical evidence provided. Economic growth vs economic development best 7 differences.
Causal relationships between financial development, foreign direct investment and economic growth the case of nigeria philip ifeakachukwu nwosa corresponding author department of economics, finance and accounting bells university of technology p. We make use of life insurance density as the proxy for life insurance. The relationship between finance and growth in china. Cointegrating and causal relationship between financial. Bettin and zazzaro 2009, in their paper they analyses the relationship between remittances and the level of financial development in economic growth. Financial development and economic growth in tanzania. The purpose of this paper is to provide a theoretical framework that integrates the endogenous growth and functions of financial markets and institutions theory in order to investigate how the financial market and the banking sector develop indicators that affect economic growth in these countries. This paper aims to examine the relationship between financial development and economic growth on the face of the recent financial crisis, using a panel dataset of 26 european union countries over the period 19902016.
The relationship between financial system development and. Contrary to the prediction of schumpeter that finance promotes growth, the empirical results suggest that financial development does not promote economic growth both in the short run and in the long run. It discusses the results of an empirical analysis between both variables and economic growth. Liang and teng 2006, using a var framework, discover a unidirectional causality from economic growth to financial development in china from 1952 to 2001. Financial development and economic growth in kenya. Causal relationships between financial development, foreign. Is the relationship between financial development and. Financial development and economic growth in ghana. The empirical approach uses multiplicative dummies to compare two distinct subperiods beforeafter the crisis. The relationship between financial development and economic. It presents evidence on a cross section of 50 african countries whose data is available for the period 1980. One of the highly debated issues in the literature of financial economics is the finance growth nexus. Pdf financial development and economic growth in china. We revisit the relationship between financial development and economic growth in a panel of 52 middleincome countries over the 19802008 period.
Energy consumption, financial development and growth. Quantifying the impact of financial development on economic. This study therefore aimed at answering the question on whether there is a relationship between capital market development and economic growth in kenya. The 1996 human development report examines basic relationships between economic growth and human development. The relationship between financial development and economic growth has not been examined extensively in kenya. The main objective of this study is to examine the relationship between financial sector development and economic growth for the following asian countries. Financial development has a positive effect on economic growth as it may increase the efficiency of capital accumulation goldsmith, 1969 and or augment the level of saving and consequently the investment level mckinnon, 1973. These studies have included both time series and cross section data. Using pooled mean group estimations in a dynamic heterogeneous panel setting, we show that there is an inverted ushaped relationship between finance and growth in the long run. From the findings, it is not clear whether financial development is the cause of economic growth or economic growth is cause of financial development. The impact of the financial system on economic growth in. The remainder part of the study is organized as the overview of financial. On the other hand, there is a very common view that financial development is significant and provides to economic growth popularly known as supply lending. Odhiambo 2009 also studied the relationship between savings and economic growth in south africa.
One of the results suggest that financial development is a crucial factor in promoting economic growth not only in developed. Financial development has played a leading role in many economies of less developed countries ledcs and africa especially. In particular, the authors examine the impact of financial development on the growth of. Financial development, financial openness, and economic. The relationship between financial development, human capital development and economic growth in sri lanka jahfer. Two models of financial development and economic growth are constructed for the zimbabwean economy. In our paper we capture the four aspects of finance depth, access, efficiency and stability to investigate the impact of financial development and economic growth. This process of reducing costs of acquiring information, enforcing contracts, and executing transactions results in the emergence of financial contracts, intermediaries, and markets. Therefore, our paper shall shed more light on the relationship between finance and growth in a country like china with an underdeveloped financial system and poor legal protection. The relationship between finance and economic growth three possible relationships between. The relationship among international trade, financial. This paper investigated the long run relationship between financial development and economic growth in.
The relationship between capital market development and. H2 1 department of accountancy and finance, faculty of management and commerce. From the above theoretical literature, we can say that economists have failed to agree on the relationship between public debt and economic growth, although the dominant opinion is the negative relationship between them. The relation between financial development and economic growth is much debated. The study suggest that the government need to develop more strategies that will further enhance the functioning of the. Economic growth, financial development, and income inequality. The panel granger causality tests establish the bidirectional causality between the financial development variables with growth. There is another important aspect of the relationship between financial development and economic growth. The pairwise granger causality test result supports the assertion that there is a unidirectional causality from financial development. Role of financial development in economic growth of nepal. Pdf causal relationship between financial development. Evans, green, and murinde 2002 evaluate the contribution of human capital and financial development to economic growth in a panel of 82 countries using the translog production function as a framework for estimating the relationships among.
Parallel to this interest in literature, this study researched the relationship between economic growth and financial development in the period 19802012 of 23 oecd countries for panel data analysis. The new aspects include, among others, testing nonlinear relationships between financial development and economic growth, analyzing both levels and changes of the financial variables, as well as estimating the models on the basis of a moving panel with overlapping observations. In shortrun, economic growth has a significant and positive effect on financial deepening in the high growth regime. Using the cointegration and causality tests for the period june 1991 to june 20, the study confirms a well defined longrun equilibrium relationship between the stock market development indicators and economic growth in india.
Economic growth is a subjective term which can be measured and one can compare it with economic growth of other country or region because it depends on manufacturing of goods and services but on the other hand economic development is a broad term which can not be measured and differs from region to region for example in usa if one does not own a. Causal relationships between financial development, foreign direct investment and economic growth the case of nigeria. The goal of this paper is to investigate the threshold cointegration effect of financial deepening on economic growth in taiwan over the period from 1981 to 2010. The relationship between financial development and. Text the relationship between financial system development and economic growth in the egyptian economy. According to this issue, many economic studies have focused on finding the relationship between economic growth and financial market development. Abstractprevious empirical studies on the causal relationship between financial development and economic growth are not instructive given their failure to.
A large number of studies have analysed the relationship between financial sector development and economic growth. The relationship between financial development and economic growth has recently received emphasis from numerous theoretical and empirical studies in both developed and developing countries. Although conclusions must be stated hesitantly and with ample qualifications, the preponderance of theoretical reasoning and empirical evidence suggests a positive, firstorder relationship between financial development and economic growth. Economic growth is a subjective term which can be measured and one can compare it with economic growth of other country or region because it depends on manufacturing of goods and services but on the other hand economic development is a broad term which can not be measured and differs from region to region for example in usa if one does not own a car heshe is not.
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