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 investigated the link between Islamic banking assets share and the financial development using five different proxies of financial development from 22 countries for the period between 2000 and 2013, and concluded that the share of Islamic banking is positively associated with the banking sector activity as measured by private credit.
Abstract: With the growing number of Islamic banks worldwide, much ink has been spilled on heated debate about its merits and ability to improve the financial sector. In order to buttress the subject matter of this debate, this paper investigate the link between Islamic banking assets share and the financial development. Using five different proxies of financial development from 22 countries for the period between 2000 and 2013, this research employs the generalized method of moments to cope with the endogeneity problem, and concludes that the share of Islamic banking is positively associated with the banking sector activity as measured by private credit. The competition of banking sector intensifies in countries with higher Islamic bank shares resulting in smaller net interest margin, whereas the structure of the financial sector does not change. A financial sector index composite regression showed that in general, financial development is positively linked to the Islamic banking presence. These findings provide empirical evidence that Islamic banking presence benefits financial development in Muslim countries.
14 citations
Cites background from "Does Financial Development Cause Ec..."
...Using these proxies for the financial development, a new composite index (FD) is estimated (following Demetriades and Hussein 1995; Bandiera et al. 2000; Mavrotas and Son 2006) which is to capture different aspects of the financial sector: structure, size and activity....
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...Hanif (2012) contrasted Islamic and conventional banking performance in Pakistan using 27 banks and concluded that conventional banks led in terms of liquidity and profitability, whereas, Islamic banks showed better risk management and higher levels of solvency....
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Book•
25 Nov 2014
TL;DR: In this article, the authors examined the long run causal relationship between the stock market and economic growth and found that stock market development has a positive impact on economic growth in Nigeria, using the endogenous growth theory as a basis of its theoretical foundation.
Abstract: This research empirically examines the relationship between stock market development and economic growth in the context of Nigeria. The question guiding this study is focused on whether the development of the stock market has had an impact on economic growth in Nigeria.
The thesis examines the long run causal relationship between the stock market and economic growth. It uses one bank and three measures of stock market development: the loans to deposit ratio of banks, Market capitalisation ratio, value traded to market capitalisation ratio as well as value traded to GDP ratio. Essentially the study uses the endogenous growth theory as a basis of its theoretical foundation.
The study exploits time series analysis techniques to test for the existence of a relationship and, where one is found to exist, the casual nature of that relationship. The study particularly applies Multivariate vector autoregressive models (VAR) and Vector Error Correction Models (VECM) in testing for the existence of a relationship.
The evidence obtained from the study shows the existence of co-integration between the stock market development and economic growth in the short as well as the long run. This suggests that stock market development has impacted on economic growth in Nigeria.
The Granger causality test findings indicate the presence of a bi-directional relationship between stock market development and economic growth. The findings of the study support the view that stock market development and economic growth in Nigeria are complementary and any improvements in the stock market would have a positive impact on economic growth in Nigeria.
The findings also support the hypothesis of endogenous growth models that financial development causes higher economic growth. The contribution of this study lies in the fact that it provides additional evidence on the ongoing debate of the impact stock markets on the economic growth process within a specific country.
13 citations
TL;DR: In this article, the authors examined whether financial development leads to economic growth in Turkey and found that there is a strong relation between finance and growth in the short-run but it is failed in the long-run casuality.
Abstract: The objective of the paper is to seek how financial growth affects economic growth in Turkey in the flourishing world. The financial market is changed and developed very rapidly in the last decade. Moreover the change of financial market has also been brought some innovations and new policies. So this study examines whether financial development leads to economic growth in Turkey. The main elements of financial liberalization that have been used commonly in the literature are considered for analysis. This is because financial liberalization is the first step to achieve financial development and can contribute to development. In the light of financial development between the period of 1980 and 2010, cointegration and Granger casuality tests are applied to assess the finance-growth linkages. There is a strong relation between finance and growth in the short-run, but it is failed in the long-run casuality. Contrary to the conventional findings in the literature, the results of the analysis support that there is one way link from financial development to economic growth for Turkey and it is necessary to take different policies to improve growth and maintain the steady economic growth. Key variables: Financial growth, financial liberalization, economic growth, Casuality, Cointegration JEL Codes: D53, E44, F43, G01, C22
13 citations
Cites background from "Does Financial Development Cause Ec..."
...Empirical research on financial development and economic growth by Demetriades and Hussein (1996) shows that there is a direct casuality from economic growth to financial development taking the ratio of bank deposit liabilities to nominal GDP and the ratio of bank claims on the private sector to…...
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27 Apr 2013
TL;DR: In this paper, the authors examined the dynamic relationship between bank-based financial development and economic growth in Hong Kong using the newly developed ARDL-bounds testing approach to examine this linkage.
Abstract: In this study, we examine the dynamic relationship between bank-based financial development and economic growth in Hong Kong. We attempt to answer one critical question: Does the relationship between bank-based financial development and economic growth in Hong Kong follow a supply-leading or a demand-following response? In other words, which sector drives economic development in Hong Kong – the real sector or the nominal sector? Unlike the majority of previous studies, this study uses the newly developed ARDL-bounds testing approach to examine this linkage. The ARDL-bounds testing approach has numerous advantages over other cointegration techniques, especially when a short time-series dataset is used. In order to test the robustness of the empirical results, two proxies of bank-based financial development have been used; namely: 1) the domestic credit provided by the banking sector as a ratio of GDP and 2) the banks' deposit as a ratio of GDP. Our empirical results show that the relationship between bankbased financial development and economic growth in Hong Kong is sensitive to the proxy used to measure the banking sector development. When domestic credit provided by the banking sector is used as a proxy for bank-based financial development, a distinct supply-leading response is found to prevail. However, when the banks' deposit is used as a proxy for bank development, a demandfollowing response is found to predominate. These results hold, irrespective of whether the causality is estimated in the short run or in the long run.
13 citations
TL;DR: Based on a comprehensive review of previous studies about the threshold effects of financial development on the process of foreign direct investment (FDI) spillovers, the present work roundly measures the financial development from the aspects of scale, structure, and efficiency and applies a multiple threshold regression model to estimate the threshold effect on FDI spillovers as mentioned in this paper.
Abstract: Based on a comprehensive review of previous studies about the threshold effects of financial development on the process of foreign direct investment (FDI) spillovers, the present work roundly measures the financial development from the aspects of scale, structure, and efficiency and applies a multiple threshold regression model to estimate the threshold effects of financial development on FDI spillovers, and then examines the inherent relationship between FDI spillovers effects and the financial development from the three aspects, respectively, in different regions of China, based on regional panel data from 2000 to 2014. The results revealed that there are two thresholds of financial development scale, structure and efficiency, existing in the FDI spillover processes in different regions. The FDI spillovers effects are greatest in the eastern region and are generally smallest in the western region. There is a negative correlation between FDI spillovers effects and the financial development scale or efficiency in eastern and central region. Moreover, there is positive correlation between FDI spillovers effects and the financial development structure in eastern and central region. Additionally, there is a positive correlation between FDI spillovers effects and the financial development scale, structure, or efficiency in western region. The capital, labor, and regional technology progress have positive effects on economic growth in different regions and the effects of financial development on economic growth are not unanimous in each region. Based on the empirical results, some policies on how to develop regional finances and how to introduce FDI to promote economic growth are recommended.
10 citations
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