relationship. All subsequent studies confirmed it (see for example King and Levine, 1993, and the review in: Pagano, 1993). Goldsmith used a sample of 35 countries for the period between 1860 and 1963 to show the relationship between income and financial depth measured by the ratio between bank's assets and GDP. He also showed that in periods of rapid growth, financial depth grows faster than income. More details about measuring financial depth can be found in this paper. FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH Velimir Šonje

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Financial development and economic growth

This thesis investigates the relationship between economic growth and financial development in developing countries over 1988-2001. Previous studies have generally used averaged data, for both developing and developed countries, and inappropriate estimation methods. In an attempt to reach some definitive conclusions, Generalised Method of Moments dynamic estimation is used with a newly collected panel of annual data to assess the relationship. The results show that while banks performance has a negative impact on growth, stock markets positively promote growth. To reach an overall conclusion about the impact of finance on growth and to solve the problems associated with the existence of multicollinearity among the different measures of financial development, principal components analysis is used to generate new, comprehensive measures of financial development. In assessing the link between the new measures and financial development and growth, the results support the existence of an overall positive relationship. The thesis also examines the behaviour of interest rates in developing and industrialised countries using individual and panel unit root tests. The results are sensitive to the choice of the test, country and time unit.

Stock markets, banks and economic growth

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross-national dataset into two sub-samples: (i) colonies versus non-colonies; and (ii) continents aligned on an East-West versus those aligned on a North-South axis. We exploit the difference in the structural variances in these two sub-samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

Rule of Law, Democracy, Openness, and Income: Estimating the Interrelationships

Using several recently available global datasets, this Staff Discussion Note examines macroeconomic effects of financial inclusion. It finds significant benefits to economic growth from financial inclusion, but the benefits diminish as financial inclusion and depth become large. Broadening access to credit can compromise economic and bank stability in countries with weak bank supervision. Other forms of financial inclusion—such as access to and use of bank accounts, branches, and ATMs—do not hurt stability, and can be promoted extensively. The note finds that gaps in financial inclusion are associated with economic inequality, but the association appears relatively weak.

https://www.imf.org/-/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1517.ashx

Financial Inclusion; Can it Meet Multiple Macroeconomic Goals?

Purpose – Since the introduction of the concepts of the J‐ and S‐curves, many researchers have tried to verify their validity empirically. This paper aims to review the related papers and to offer direction for future research.Design/methodology/approach – This is a review paper. As such, no method is employed here. Rather, the methodologies used by others to test the J‐ and S‐curves are explained and reviewed.Findings – No new findings are offered since this is a review paper.Practical implications – The J‐ and S‐curves show whether currency depreciation worsens the trade balance first before improving it. Since the majority of studies are country‐specific, policymakers could benefit by learning whether currency depreciation will be effective in improving the trade balance.Originality/value – This is a literature review paper and its originality is in terms of collecting the literature together and presenting it in one single paper.

The J‐ and S‐curves: a survey of the recent literature

The effect of exchange rate risk on individual countries' macroeconomic variables can follow an ambiguous pattern, thus making it better to text each case empirically. The effect of exchange rate volatility on stock market development is still an enigma. This article investigates the effect of exchange rate uncertainty on stock market development as one of the most important indicators of financial market development. To do this, we develop long- and short-run models (a bounds testing approach to cointegration) for twelve emerging economies over the period 1980-2010. Estimates from all models show that exchange rate volatility has a significant effect on stock market development in both the short run and long run in a majority of countries. Despite many similarities among emerging economies, the results obtained in this article suggest that the effect of exchange rate volatility on stock market development works via each country's specific structure and characteristics.

Exchange rate volatility and stock market development in emerging economies

Integration of emerging stock markets with global stock markets

On the link between financial market inclusion and trade openness: An asymmetric analysis

Financial market inclusion, shadow economy and economic growth: New evidence from emerging economies

In introducing an absorption approach to the trade balance, Alexander (1952) argued that if wages do not adjust fully to the inflationary effects of devaluation, devaluation can redistribute income from workers to producers in the form of increased profits. Increased profits, in turn, could give incentive to producers to invest more. On the other hand, because devaluation raises the costs of imported inputs, it could lower profits. Depending on the relative strength of these two channels, domestic investment could increase or decrease. By giving greater consideration to the short-run and the long-run effect of currency depreciation on domestic investment, this paper presents empirical results from a time-series model of 50 countries. We find that the devaluation-investment link is mostly a short-run phenomenon. However, in 21 countries in which the short-run effects last into the long run, both views are supported, almost equally.

Massomeh Hajilee

Papers

Exchange rate volatility and stock market development in emerging economies

Integration of emerging stock markets with global stock markets

On the link between financial market inclusion and trade openness: An asymmetric analysis

Financial market inclusion, shadow economy and economic growth: New evidence from emerging economies

On the relation between currency depreciation and domestic investment