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...
Citations
More filters
16 Sep 2010
TL;DR: In this paper, the authors apply the TYDL procedure to test the comparative advantage of the banking system vs. stock market in China, and show that there exists a bi-directional Granger causality between the banking development and the economic growth in China.
Abstract: This paper applies the TYDL procedure to test the comparative advantage of the banking system vs. stock market in China. For the availability of the data, we confine our analysis between 1992Q1 to 2008Q4. Empirical result shows that there exists bi-directional Granger causality between the banking development and the economic growth in China; on the contrary, evidence implies that the stock market in China generally has a negative impact on economic growth but economic growth indeed has promoted the stock market development.
TL;DR: In this paper, the authors investigated the direction of causality between stock market development and economic growth in the Indian context using the cointegration and causality tests for the period June 1991 to June 2013.
Abstract: The link between stock market development and economic activity has always been the subject of considerable debate in the field of economics and it raises empirical question whether stock market development influences economic activity or whether it is a consequence of increased economic activity. This study attempts to investigate the direction of causality between stock market development and economic growth in the Indian context. Using the cointegration and causality tests for the period June 1991 to June 2013, the study confirms a well defined long-run equilibrium relationship between the stock market development indicators and economic growth in India. The empirical results show bidirectional causality between market capitalisation and economic growth and unidirectional causality from turnover ratio to economic growth in the long-run and short-run. By and large, it can be inferred that the stock market development indicators viz. market capitalisation and turnover ratio have a positive influence on economic growth in India.
Journal Article•
TL;DR: In this paper, a study employing time series industry level data investigated the effect of financial market development particularly stock market development, firm specific factors and macro economic factors on the capital structure of Indian industries for the post reform period.
Abstract: To make a country economically strong and to attract investors from all over the world, stock market has to play an important role. A strong, stable and transparent stock market is essential for a strong economy where it provides an efficient delivery mechanism for savings mobilization and allocation, risk and liquidity management and corporate governance. The study employing time series industry level data investigated the effect of financial market development particularly stock market development, firm specific factors and macro economic factors on the capital structure of Indian industries for the post reform period. The sample of industries in the study are heterogeneous in nature, hence the results indicate a diverse relationship between the debt-equity ratios and the firm specific, macro economic and stock market development indicators. The results reveal that out of fifteen industries nine industries have negative coefficient values for stock market development indicators, implying an increase in equity finance with the development of stock market, remaining six industries have positive coefficient values indicating complementarities between debt and equity finance. Contrary to earlier empirical results, the study finds that along with larger industries, few smaller industries with lesser share in total gross value added have also affected by stock market development.
TL;DR: In this article , an autoregressive distributed lag bound test has been employed to explore short-run and long-run interactions between financial development, human development and economic growth of the Indian economy.
Abstract: The interrelationship between human development, financial development and economic growth exhibited a very interesting yet peculiar fact that human development is the prime determinant of the development process bestowing significantly to economic growth as well as the development of the financial sector in the Indian economy. To explore short-run as well as long-run interactions between financial development, human development and economic growth of the Indian economy, the autoregressive distributed lag (ARDL) bound test has been employed. It is vital to state that financial development is detected as negatively impacting the growth of the Indian economy; alternatively, growth could have been additionally enhanced through auxiliary human development instead of emphasising financial development at large. Therefore, the need of the hour is to formulate concrete plans and policies to spearhead the development of human resources through the promotion of education and health facilities as an integral part of our policy frame which may axiomatically reinforce the potency of the financial system as well as economic growth in India.
TL;DR: In this paper, the impact of bank crisis on the finance growth link in emerging economies was analyzed using generalized method of moments (GMM) technique, and it was observed that while banking sector development is related to economic growth, no statistically significant relation is observed between stock markets and or bonds markets and economic growth.
Abstract: The finance growth literature ignores the role of bond markets in financing private investments. Moreover, the impact of bank crisis on the finance growth link has been largely overlooked. This paper aims at casting light at the finance growth link in emerging economies by accounting for bond markets and controlling for banking sector crises. Data on economic growth and financial development indicators for 15 emerging economies (drawn from Africa, Asia, Latin America, and Europe) were analysed using a system generalized-method-of-moments (GMM) technique. It is observed that while banking sector development is related to economic growth (albeit negatively), no statistically significant relation is observed between stock markets and or bonds markets and economic growth. Moreover, a banking crisis is found to affect the finance growth link in such a manner that the link weakens when a banking crisis is introduced to the model. Our results are robust to omitted variable bias, simultaneity problem, heteroscedasticity and autocorrelation.
References
More filters
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)....
[...]
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....
[...]
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