Does Financial Development Cause Economic Growth? The Case of India
TL;DR: In this paper, the authors examined whether financial development has "caused" economic growth in India since 1996 and examined the dynamic interactions between the growth of real Gross Domestic Product and indicators of financial development.
Abstract: This 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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TL;DR: In this paper, the authors analyzed the short and long term relationship between the real GDP, the equity amounts outstanding, the corporate bond amounts outstanding and bank credit to the private sector for five emerging markets and found the existence of a stable relationship in the direction from economic growth to financial market development.
Abstract: This paper tests both the short and long term relationship between the real GDP, the equity amounts outstanding, the corporate bond amounts outstanding and bank credit to the private sector for five emerging markets. In particular, the finance-growth nexus is analysed with data collected from China, Indonesia, the Philippines, South Korea and Thailand between 1994 and 2009 using panel VECM analysis. The cointegration technique is then used to examine the long run behavior based on the assumption that all the variables involved have the same degree of integration and the error correction model (ECM) and the Wald test are employed to determine the direction of causality. The empirical results suggest the existence of a stable relationship in the direction from economic growth to financial market development that is consistent with the information asymmetry arguments for emerging markets. The findings have implications for financial and economic policy makers and enable these stakeholders to determine which sectors should be encouraged to achieve overall economic growth and development. The results are also useful to investors as they show the level of the intensity of information asymmetry on which these relationships might vary in both the short and long run.
6 citations
Cites background from "Does Financial Development Cause Ec..."
...Goetzmann and Jorion (1999) define an emerging market as a stock market in a developing country that is included in a current major database....
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30 Jun 2012
TL;DR: In this paper, the authors provided further empirical evidence about the relationship between stock market development and economic growth by utilizing unbalanced panel data from some Arab countries (Bahrain, Egypt, Jordan, Oman, Qatar, Saudi Arabia, Tunis, and United Arab Emirates).
Abstract: This study aims to provide further empirical evidence about the relationship between stock market development and economic growth by utilizing unbalanced panel data from some Arab countries (Bahrain, Egypt, Jordan, Oman, Qatar, Saudi Arabia, Tunis, and United Arab Emirates) over the period (1980 – 2008). The results of both fixed and random effects models indicate that there is a positive effect of stock market development (as measured by Market Capitalization Ratio and Turnover Ratio) on economic growth. This result supports the viewpoints that stock market development can enhance economic growth, and counters the skeptic's point of view that the volatile nature of stock markets and speculation in developing countries may retard economic growth. On the other hand, the results support that economic growth has positive and statistically significant influence on stock market development indicators. This conclusion points out that there is a reciprocal relationship between stock market development and economic growth. The results of this study provide some policy issues in which policy makers in Arab countries should play an active role to foster the stock markets of these countries through removing the legal and regulatory impediments to Arab stock markets and realizing the international integration of these markets.
6 citations
Cites background from "Does Financial Development Cause Ec..."
...The Case of India”, South Asia Economic Journal, 9 (1): pp. 109-139....
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...In India, Chakraborty (2008) tried to reveal the dynamic interactions between the growth of real GDP and indicators of financial development using a data set of the period (1996-2007)....
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...This study concentrated mainly on stock market development and its causal linkage with economic growth, rather than interactions between the growth of the real GDP and broad indicators of overall financial development as was manipulated by Chakraborty (2008)....
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TL;DR: In this paper, the authors discuss the post 1980 liberalization in Turkey with special emphasis on the regional interaction between financial markets and business environment, and conclude that bank loans continue to dominate the financing of business start ups, while deposit volume's effect seems to deviate from the expectations.
Abstract: Financial liberalization in various forms affects economic growth and activity. While cross country and time series observations underline the benefits of financial liberalization on growth, recent regional studies try to deepen the observation by distinguishing economic growth and economic activity. Firm formation and thus entrepreneurship is one of the major tools to understand the behavior of economic activity. While numerous factors may be labeled to understand the determinants of entrepreneurial behavior, a new debate widens to describe a special role for financial liberalization as to explain motivations of entrepreneurship. Originating from this core debate the study aims to discuss the post 1980 liberalization in Turkey with special emphasis on the regional interaction between financial markets and business environment. Result underline that bank loans continue to dominate the financing of business start ups, while deposit volume’s effect seems to deviate from the expectations.
6 citations
TL;DR: In this article, the impact of the concurrent liberalization of current and capital accounts and quality institutions on stock market development was investigated using annual data from 1996-2013 for a panel of 53 developed and developing countries and utilizing dynamic GMM estimators.
Abstract: This paper focuses on the impact of the concurrent liberalization of current and capital accounts and quality institutions on stock market development. Using annual data from 1996-2013 for a panel of fifty three (53) developed and developing countries and utilizing dynamic GMM estimators, the results show that banking sector development, economic growth, and the interaction term affect stock market development positively. The paper finds that capital account liberalization affects market development negatively, but the effect of capital account liberalization on market development is contingent on the level of economic growth and development. Further, the results revealed that the impact of trade openness on stock market development is mixed. The research finds negative impact of institutional factors on market development. Finally, the paper does not find support in favour of simultaneous openness hypothesis.
6 citations
Cites result from "Does Financial Development Cause Ec..."
...This finding is consistent with Chakraborty [23], Zang and Kim (2007)....
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TL;DR: In this paper, the authors investigated the impacts of political and economic stability on financial stability in BRICT countries, namely Brazil, Russia, India, China and Turkey, by using dynamic cross-sectional analysis based on quarterly panel data sets.
Abstract: In this paper, we investigate the impacts of political and economic stability on financial stability in the BRICT countries, namely Brazil, Russia, India, China and Turkey, by using dynamic cross-sectional analysis based on quarterly panel data sets. In the present study, we mainly employ the common correlated effects group mean (CCEGM) model, which adds a dynamic nature to panel data analysis. The empirical results show that there is a strong effect from political risk and economic deterioration towards financial stability. We discuss the policy implications of the findings for the emerging markets. Additionally, the applied methodology allows us to produce empirical findings for each country, thus facilitating country-specific discussions.
5 citations
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TL;DR: 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.
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.
27,170 citations
Book•
01 Jan 1934
TL;DR: Buku ini memberikan infmasi tentang aliran melingkar kehidupan ekonomi sebagaimana dikondisikan oleh keadaan tertentu, fenomena fundamental dari pembangunan EKonomi, kredit, laba wirausaha, bunga atas modal, and siklus bisnis as mentioned in this paper.
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.
16,325 citations
TL;DR: In this paper, the authors examined a cross-section of about 80 countries for the period 1960-89 and found that various measures of financial development are strongly associated with both current and later rates of economic growth.
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.
8,204 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)....
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7,554 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....
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Posted Content•
TL;DR: This paper showed 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.
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