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 article, the authors investigated the panel of seven African countries from 1990 to 2015 with a view to determine the direction of causality between the financial development and economic growth in Africa.
Abstract: This research work investigated the panel of seven African Countries from 1990 to 2015 with a view to determine the direction of causality between the financial development and economic growth in Africa. Dumitrescu-Hurlin Panel Causality test was implemented and the results across the countries under study revealed thatit is strongly evident to reject the null that market value does not homogeneously cause economic growth.This tends to imply that market value across the countries can be used to predict the economic growth in the long run. Similarly, there is strong evidence to reject the null that inflation does not homogenously cause economic growthwhich tends to imply that there is causality effect of inflation on the economic growth of these
2 citations
Cites background from "Does Financial Development Cause Ec..."
...In fact, Indrani (2007) argued that it is not just a matter of intellectual curiosity to examine the nexus between the financial development and economic growth of nations but also as a crucial policy issue....
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TL;DR: In this article, the authors investigated empirically the link between financial development and economic growth in Cote D'Ivoire using time series data covering the period of 1970-2014, both in short and long run.
Abstract: The aim of this article was to investigate empirically the link between financial development and economic growth in Cote d’Ivoire using time series data covering the period of 1970-2014, both in short and long run. The Error correction model and cointegration method were performed to capture the short and long run dynamics of this relationship respectively. The cointegration test result showed evidence of long-run and significant causal between financial development and economic growth in Cote d’Ivoire during the study period. Furthermore, the coefficient of the error correction term (ECT) in the short-run dynamic model was statistically insignificant with inappropriate sign and weak. Consequently, the empirical evidence suggests that countries authorities should promote domestic private credit to boost liquidity level to ensure long-term price stability and strengthen local industries production capacities.
2 citations
TL;DR: In this article, the authors investigated empirically into the role played financial market leading growth, with evidence from the Jordan financial market, and found that the causality relationship between financial market development and economic growth in Jordan is bi-directional.
Abstract: This study investigates empirically into the acclaimed positive role played financial market leading growth, with evidence from the Jordan financial market. Utilising, several econometric techniques models, such as unit root test, co-integration test and formal tests of causality developed by C.J. Granger and yearly Jordan data for the period 1980-2012. Results show that both Engle-Granger and Johansen co-integration test support the view that there is a short-run and long-run relationship between financial market development and economic growth in Jordan. On the other hand, there was no evidence to support the view that financial market in Jordan is a leading sector in the process of the country’s economic development. In particular, the causality relationship between financial market development and economic growth in Jordan is bi-directional. Higher development in the financial market causes higher real economic growth. High economic growth in turn promotes development in the financial market. This study’s results will be useful in reaching policy decisions to develop financial markets to increase economic growth in developing countries or/ emerging economies, in general, and within Jordan, in particular. Furthermore, providing empirical evidence regarding this critical issue within specific emerging economies will add to the literature on financial market related to the role of financial market development and its influence on economic growth and, thus, initiate an exciting topic for research.
2 citations
Cites background from "Does Financial Development Cause Ec..."
...Nevertheless, [49] and [50] their study indicates that causality runs from the GDP growth to financial market growth relationship in post-reform in India....
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TL;DR: In this article , the authors examined the nature of the association among financial development, economic growth, foreign direct investment and trade openness in four South Asian countries from the period 1990-2019, and employed Granger Causality test in Vector Error Correction Model (VECM) framework to find out the dynamic relationship among the variables.
Abstract: This study examines the nature of the association among financial development, economic growth, foreign direct investment and trade openness in four South Asian countries from the period 1990–2019. The study employed Granger Causality test in Vector Error Correction Model (VECM) framework to find out the dynamic relationship among the variables. Further, variance decomposition analysis (VDA) and impulse response function (IRF) is also applied to determine the relationships among the variables beyond the sample period. The empirical result shows support for growth-led financial development, growth-led foreign direct investment and growth-led trade openness hypothesis for India. For Pakistan, the results suggest growth-led financial development and growth-led foreign direct investment. In the case of Sri Lanka, the results suggest foreign direct investment-led growth and trade openness-led growth hypothesis. The results do not support any kind of causal relationship among the variables in the case of Bangladesh in the short run. Furthermore, no bidirectional causality among the variables was found for all the countries. The findings imply that all four countries should adopt policies to promote further trade liberalization, financial sector development and also need to fast-track reforms to improve the investment climate and attract investments to attain high economic growth in the long run.
2 citations
TL;DR: In this paper, the authors adopted financial deepening, foreign direct investment, banking credit to private sector, stock market size and stock market efficiency as independent variables along with economic growth as dependent variables.
Abstract: It has been a self-proclaimed fact that financial development boosts economic growth in the short as well as in the long run. This particular study has taken financial development indicators from banking and secondary market perspectives into consideration. We find the banking sector more prominent and more influential in contrast to secondary markets as by revealed their coefficients. The study adopts financial deepening, foreign direct investment, banking credit to private sector, stock market size, stock market efficiency and stock market liquidity as independent variables along with economic growth as dependent variables. All the variables except banking credit to private sector have a significant and positive relationship with economic growth. Results show that financial development affects economic growth positively. Financial deepening, stock market liquidity and foreign direct investment have only one way causality while stock market size has two-way causality.
2 citations
Cites background from "Does Financial Development Cause Ec..."
...2007, Chakraborty, 2008, Ibrahim, 2007, Morley, 2006, and Ho & Odhiambo, 2012)....
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...There are some country-specific empirical investigations such as Thangavelu & Jiunn, (2004), Ibrahim (2007), Agarwal et al., (2007), Chakraborty (2008) and Deb &Mukherjee (2008); they focus upon the relationship of financial development with economic growth....
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...Chakraborty (2008) conducted a research to find out whether financial development ‘caused’ economic growth in India?...
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References
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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