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Journal ArticleDOI

Does Financial Development Cause Economic Growth? The Case of India

01 Jun 2008-South Asia Economic Journal (SAGE Publications)-Vol. 9, Iss: 1, pp 109-139

AbstractThis article examines whether financial development has ‘caused’ economic growth in India since 1996. The dynamic interactions between the growth of real Gross Domestic Product and indicators of fi...

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Citations
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Journal Article
01 Jan 2000-Kyklos

592 citations

Posted Content
Abstract: This study uses a threshold regression model and finds new evidence that the positive impact of FDI on growth “kicks in” only after financial market development exceeds a threshold level. Until then, the benefit of FDI is non-existent.

233 citations


Cites background from "Does Financial Development Cause Ec..."

  • ...It measures the overall size of the financial system but may not accurately reflect the efficiency of the banking sector (Demetriades and Hussein, 1996)....

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Journal ArticleDOI
Abstract: This paper empirically examines the relationship between financial development and economic growth in a small open economy of United Arab Emirates (UAE). Using time series data from 1974 to 2008, the study employs the autoregressive distributed lag (ARDL) approach to co-integration. The analysis is carried out using two indicators to measure the level of financial development. The first indicator is the financial depth or size of the financial intermediaries sector as measured by the monetization ratio (M2/GDP). The second indicator is the ratio of the credit provided to private sector by commercial banks as a percentage of the GDP (financial intermediation ratio). The results show a negative and statistically significant relationship between financial development, as measured by M2/GDP, and economic growth. The results also suggest a bi-directional causality between the two variables. Over all, the evidence supports neither the demand-following nor the supply-leading hypotheses for UAE.

83 citations


Cites methods from "Does Financial Development Cause Ec..."

  • ...This hypothesis has received support from numerous theoretical and empirical studies including Patrick (1966), Demetriades and Hussein (1996), Luintel and Khan (1999), Greenwood and Smith (1997), Al-Yousif (2002) and Calderón and Liu (2003), among others....

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01 Jan 2011
Abstract: Women play a crucial role in the economic development of their families and communities but certain obstacles such as poverty, unemployment, low household income and societal discriminations mostly in developing countries have hindered their effective performance of that role. As such, most of them embark on entrepreneurial activities to support their families. It is discovered that women entrepreneurship could be an effective strategy for poverty reduction in a country; since women are the worst hit in such situation. However, it is discovered that women entrepreneurs, especially in developing countries, do not have easy access to microfinance factors for their entrepreneurial activity and as such have low business performance than their men counterparts, whereas the rate of their participation in the informal sector of the economy is higher than males, and microfinance factors could have positive effect on enterprise performance. The objective of this study is to examine the effect of credit, savings, training and social capital on women entrepreneurs’ performance in Nigeria. The study involves a survey using structured questionnaire and an indepth interview to solicit responses from women entrepreneurs, and secondary data from microfinance institutions. Data analysis involves the use of Structural Equation Modelling.

79 citations


Cites background from "Does Financial Development Cause Ec..."

  • ...…and increases poverty level in a country; and studies worldwide have shown that low economic development and high poverty in a country is due to that country’s inability to develop her financial sector (Chakraborty, 2008; Iganiga, 2008; Stephen & Wilton, 2006; William & Thawatchai, 2008)....

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  • ...Such distresses often hinder economic development and increases poverty level in a country; and studies worldwide have shown that low economic development and high poverty in a country is due to that country’s inability to develop her financial sector (Chakraborty, 2008; Iganiga, 2008; Stephen & Wilton, 2006; William & Thawatchai, 2008)....

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Journal ArticleDOI
Abstract: This article examines the impact of the developments in the financial sector on economic growth in India in the post-reform period. The model of Mankiw et al. (1992) was extended to establish a relationship between financial development and economic growth. The model was then estimated using quarterly data for the period 1993 to 2005 for India, using the techniques of cointegration and vector error correction method. Cointegration results show that capital–output ratio and rate of growth of human capital have positive effects on real rate of growth of GDP, irrespective of the indicator of stock market development. An increase in the market capitalization dampens economic growth, whereas turnover has no significant effect, and an increase in the money market rate of interest has a positive effect on economic growth. Real wealth, debt burden, real effective exchange rate and the rate of growth of labour have negative effects. Vector error correction method shows that the ECM term relating to market capitali...

56 citations


Cites background or methods from "Does Financial Development Cause Ec..."

  • ...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998). 5. Relating stock and credit market expansion with economic growth in five emerging markets, namely, India, South Korea, Chile, Mexico and Taiwan, Spyrou and Kassimatis (2001) observe that equity markets have a role to play in Chile and Mexico. On the other hand, in these two countries banking crises in the 1980s and 1990s resulted in a negative relation between economic growth and credit market. Development of the stock market in Chile and Mexico since the second half of the 1980s was also noted by Demirguc-Kunt and Levine (2001), where they identified these two countries among others as market-based economies on the basis of a structure index....

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  • ...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998). 5. Relating stock and credit market expansion with economic growth in five emerging markets, namely, India, South Korea, Chile, Mexico and Taiwan, Spyrou and Kassimatis (2001) observe that equity markets have a role to play in Chile and Mexico....

    [...]

  • ...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008)....

    [...]

  • ...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998)....

    [...]

  • ...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2....

    [...]


References
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Journal ArticleDOI
Abstract: The relationship between co-integration and error correction models, first suggested in Granger (1981), is here extended and used to develop estimation procedures, tests, and empirical examples. If each element of a vector of time series x first achieves stationarity after differencing, but a linear combination a'x is already stationary, the time series x are said to be co-integrated with co-integrating vector a. There may be several such co-integrating vectors so that a becomes a matrix. Interpreting a'x,= 0 as a long run equilibrium, co-integration implies that deviations from equilibrium are stationary, with finite variance, even though the series themselves are nonstationary and have infinite variance. The paper presents a representation theorem based on Granger (1983), which connects the moving average, autoregressive, and error correction representations for co-integrated systems. A vector autoregression in differenced variables is incompatible with these representations. Estimation of these models is discussed and a simple but asymptotically efficient two-step estimator is proposed. Testing for co-integration combines the problems of unit root tests and tests with parameters unidentified under the null. Seven statistics are formulated and analyzed. The critical values of these statistics are calculated based on a Monte Carlo simulation. Using these critical values, the power properties of the tests are examined and one test procedure is recommended for application. In a series of examples it is found that consumption and income are co-integrated, wages and prices are not, short and long interest rates are, and nominal GNP is co-integrated with M2, but not M1, M3, or aggregate liquid assets.

25,329 citations

Book
01 Jan 1934
Abstract: Buku ini memberikan infmasi tentang aliran melingkar kehidupan ekonomi sebagaimana dikondisikan oleh keadaan tertentu, fenomena fundamental dari pembangunan ekonomi, kredit dan modal, laba wirausaha, bunga atas modal, dan siklus bisnis.

16,271 citations

Journal ArticleDOI
Abstract: Joseph Schumpeter argued in 1911 that the services provided by financial intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers, and facilitating transactions -stimulate technological innovation and economic development. The authors present evidence that supports this view. Examining a cross-section of about 80 countries for the period 1960-89, they find that various measures of financial development are strongly associated with both current and later rates of economic growth. Each measure has shortcomings but all tell the same story: finance matters. They present three main findings, which are robust to many specification tests: The average level of financial development for 1960-89 is very strongly associated with growth for the period. Financial development precedes growth. For example, financial depth in 1960 (the ratio of broad money to GDP) is positively and significantly related to real per capita GDP growth over the next 30 years even after controlling for a variety of country-specific characteristics and policy indicators. Financial development is positively associated with both investment rate and the efficiency with which economies use capital. Much work remains to be done, but the data are consistent with Schumpeter's view that the services provided by financial intermediaries stimulate long-run growth.

7,663 citations


"Does Financial Development Cause Ec..." refers background in this paper

  • ...Several studies show that it is the bank-based financial structure that spurs economic growth (Boyd and Prescott 1986; King and Levine 1993)....

    [...]

Journal ArticleDOI

7,090 citations


"Does Financial Development Cause Ec..." refers background in this paper

  • ...Schumpeter (1912), in his effort to analyze the importance of technological innovation in long-run economic growth, emphasized the crucial role that the banking system would play in facilitating investment in innovation and productive investment by the entrepreneur....

    [...]

Posted Content
Abstract: Do well-functioning stock markets and banks promote long-run economic growth? This paper shows that stock market liquidity and banking development both positively predict growth, capital accumulation, and productivity improvements when entered together in regressions, even after controlling for economic and political factors. The results are consistent with the views that financial markets provide important services for growth and that stock markets provide different services from banks. The paper also finds that stock market size, volatility, and international integration are not robustly linked with growth and that none of the financial indicators is closely associated with private saving rates. Copyright 1998 by American Economic Association.

3,399 citations