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, an attempt is made to study the causality between "ease of doing business" and productivity by using the credit to deposits ratio of banks as a proxy to measure availability of finance and lending practices.
Abstract: It has been comprehensively debated by economists, that availability of finance is a very important determinant of output in an economy. In the literature, there are strong arguments for and against this idea. It is generally agreed that finance, up to a certain extent, can act as a facilitator to the process of economic growth. Beyond a point, it may begin to destabilize the economy. Scholars normally measure the performance of an economy in terms of its productivity. This leads to the fact that if business has been made easier, productivity should have increased. Thus, there should be some link between “ease of doing business” and productivity. In recent rankings of ease of doing business, one of the important pillars was that of “getting credit”. If it is an important pillar, it should be related to productivity, as measured by change in real GDP. Availability of credit can be measured by the credit to deposits ratio of banks as a proxy to measure availability of finance and lending practices. In this paper, this variable will be used to study the patterns across major states of India, to judge the ease of doing business in these states. An attempt is made to study the causality between “ease of doing business” and productivity.
TL;DR: In this paper, the authors employed time series data on relevant empirical diagnostics to examine banking sector growth-led nexus within the context of Africa's largest economy, Nigeria, and found no causal relationships between banking sector reforms and economic growth in the short-run and that, though liberalisation in particular did not Granger-cause growth of the economy during the study period, banking sector reform caused growth of real sector of the Nigerian economy.
Abstract: This paper employed time series data on relevant empirical diagnostics to examine banking sector growth-led nexus within the context of Africa’s largest economy, Nigeria. Diagnostics established stationarity of banking sector indicators and control variables at first difference. Findings showed no causal relationships between banking sector reforms and economic growth in the short-run and that, though liberalisation in particular did not Granger-cause growth of the economy during the study period, banking sector reforms caused growth of the real sector of the Nigerian economy. Hence, the caveat was that long-run growth effects of banking sector reforms on real sectors of economies are functions of policy targets of such banking or financial sectors reform strategies. Consequently, articulation of banking and financial sectors reforms within long-run rather than short-run perspectives and complementarity of liberalisation were recommended.
Cites background or methods from "Does Financial Development Cause Ec..."
...A study by Demetriades and Hussein (1996) on 16 countries found a bi-directional causality between financial development and economic growth for some of the countries but unidirectional causality from economic growth to financial development in other countries....
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...In line with the trends in literature (Demetriades and Hussein, 1996; McKinnon, 1988; Patrick, 1996; Jung, 1986), this paper employed time series data on such relevant diagnostics as unit roots and Johansen (1988) co-integration procedures, and Granger-type causality tests as well as error…...
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TL;DR: In this article, the impact of stock market development on economic growth using data on twenty-seven emerging market economies over the period 1995-2012 was examined, and it was shown that significant improvement of stock markets, making the economy internationally open, and improving the aggregate investment can improve their economy.
Abstract: This study empirically reexamines the impact of stock market development on economic growth using data on twenty-seven emerging market economies over the period 1995-2012. We use market capitalization, trade value and turnover ratio as indicators of stock market development. Also, we construct three alternate composite indices of stock market development and used them in the growth regression each at a time. Methodologically, we employ the dynamic panel ‘system GMM’ estimators which is free from the problem of endogeneity and measurement errors; secondly, a 2nd generation panel unit root test of Pesaran (2007) is employed to test the stationary properties of data; finally, in order to test the direction of causality we make use of a newly developed panel non-causality test of Dumitrescu and Hurlin (2012) which is designed for heterogeneous panel. Our empirical findings indicate that stock market development significantly contributes to economic growth. This is evident in all the three alternate indices of financial development employed in the study. Further, we find a unidirectional causation running from stock market development to economic growth, supporting the supply-leading hypothesis. We also find that macroeconomic variables, such as investment ratio, trade openness and exchange rate have strong influence on economic growth. Thus, the study suggests that significant improvement of stock markets, making the economy internationally open, and improving the aggregate investment the emerging market economies can improve their economy.
Cites background from "Does Financial Development Cause Ec..."
...Chakraborty (2008) uses five financial development indicators (market capitalization, turnover ratio, stock price volatility, total bank credit to GDP and liquid liability) and examine their impact on economic growth for India....
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...The financial development may either bank-base or stock market-base or banking and stock market development taking together (Chakraborty and Ray, 2006; Chakraborty, 2008; Seetanah et al., 2012)....
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01 Jan 2023
TL;DR: The role of the stock market in the debate on the role of financial development on economic growth is discussed in this paper , where the authors discuss some studies which show that stock market played some positive role in promoting economic growth in many countries specially in the developed ones.
Abstract: In this chapter we first discuss the role of the stock market in the debate on the role of financial development on economic growth. We discuss some studies which show that stock market played some positive role in promoting economic growth in many countries specially in the developed ones. We also discuss some studies which put forward some dissenting arguments and show that stock market is harmful for the developing countries. Then we present a brief overview of the stock market development in India since the economic reforms in 1991. Finally we present the structure of the book discussing the contents of each chapter in greater detail
Journal Article•
TL;DR: The economic globalization has had a particular profound impact upon financial development during the last four decades giving rise to a group of closely intertwined international markets on which banks, corporations, or government agencies trade an increasing amount of assets such as bonds, shares, or currencies as mentioned in this paper.
Abstract: The economic globalization has had a particular profound impact upon financial development during the last four decades giving rise to a group of closely intertwined international markets on which banks, corporations, or government agencies trade an increasing amount of assets such as bonds, shares, or currencies. The transaction cost of accessing external funds has shrunk considerably, which facilitates investment and market entry, entails competitive pressures to innovate, mobilizes savings to accumulate capital, and eventually induces further economic growth. Still, in terms of financial development, considerable heterogeneity continues to exist around the world. The importance of understanding the factors behind the time series variation in financial development, alongside those that shape the cross-country variation, cannot be over emphasized. In a world of capital immobility, investments are bound to be solely financed by domestic savings. However, varying degrees of financial development and exchange rate flexibility between countries can both potentially act as frictions to international financial integration.
Cites background from "Does Financial Development Cause Ec..."
...Thus, financial intermediaries provide relatively higher yield contributing to rise in capital productivity and speeding up the growth (Indrani, 2008)....
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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