Using a Vector Autoregression (VAR) approach, several hypotheses are re-examined suggested by the literature concerning the relationship between financial development and economic growth, investment and productivity. The models use quarterly time-series data from ten OECD countries and China. Innovation accounting or variance decomposition and impulse response function analysis is applied to examine interrelationships between variables in the VAR system and, therefore, differs from the more usual Granger causality approach. In particular, it examines the relationship between financial development proxied by total credit. At best, weak support is found for the hypothesis that financial development 'leads' economic growth.

Does financial development ‘lead' economic growth? A vector auto-regression appraisal

Financial development, foreign investment and economic growth in Malaysia

Using a Vector Autoregression (VAR) approach, we examine the impact of financial development on economic growth in China. Innovation accounting (variance decomposition and impulse response function) analysis is applied to examine interrelationships between variables in the VAR system and, therefore, diers from the more usual approach. We find that financial development comes as the second force (after the contribution from labor input) in leading economic growth in China. This study has supported the view in the literature that financial development and economic growth exhibit a two-way causality and hence is against the so-called “finance-led growth” hypothesis. The study of this kind in the case of China is limited; it therefore provides an interesting advance in the literature on the finance-growth nexus. c 2006 Peking University Press

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Does Financial Development 'Lead' Economic Growth? The Case of China

This study investigates the impact of financial development and trade openness on GDP growth in Pakistan using annual data over the period 1980-2009. The analysis is based on the bound testing approach of co-integration advanced by Pesaran et al (2001). The empirical results confirm the validity of trade led growth and financial led growth hypothesis in Pakistan. A co-integrated relationship between economic growth, trade openness and financial development was noticed in both the long-run and short-runs. Further analysis showed that trade openness and financial development Granger-cause economic growth in the period of study.

M.I Ansari

Papers

Impact of financial development, money, and public spending on Malaysian national income: an econometric study