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 propose a transformation on original market returns in the objective of relaxing the strong assumption of market efficiency behind application of an asset pricing model, which will widen the scope of rational models on asset pricing ranging from an efficient to an inefficient market.
7 citations
TL;DR: In this paper, the authors employed the Autoregressive distributed lag (ARDL) approach of cointegration with the structural break in time series data for the period of 1980-2017.
7 citations
Cites background from "Does Financial Development Cause Ec..."
...As in the Chinese case discussed in Liang and JianZhou (2006), Chakraborty (2008) finds in the case of India that causality runs from growth to financial development employing granger causality tests....
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TL;DR: In this article, the authors analyzed the relationship between the stock markets and the economic activity in seven countries with the research objective to identify these relationships in relation of cause and effect, and concluded that stock markets may be considered as the significant predictor of the real economic activity with the lag of one quarter, however, there is no reciprocal links between them.
Abstract: There is no doubt about the existence of connection between the stock markets and the real economic activity. Many researchers indicated that the stock markets causally affect the economic activity with the lag of three months. Contrary, the other group of researchers suggested, that these relationships are reversal, moreover some of them concluded that these relationships are reciprocal. The paper analyses the relationship between the stock markets and the economic activity in seven countries with the research objective to identify these relationships in relation of cause and effect. As the proxy of the stock markets are stock indices considered, while the economic activity is expressed by the Gross Domestic Product at constant prices. The correlation analysis and the Granger causality test applied on suggested vector autoregressive models are employed for the research in the paper. The paper concludes that stock markets may be considered as the significant predictor of the real economic activity with the lag of one quarter, however, there is no reciprocal links between them.
7 citations
30 Aug 2013
TL;DR: In this article, the authors examined the co-integration relationship and causality direction between the stock market and the economic growth of Malaysia using time series quarterly data over a timescale of 15 years spanning from the first quarter of 1991 to the last quarter of 2009.
Abstract: This study attempted to examine the co-integration relationship and causality direction between the stock market and the economic growth of Malaysia. The study used time series quarterly data over a timescale of 15 years spanning from the first quarter of 1991 to the last quarter of 2009. Share price (independent variable) data as the indicator of stock market performance was collected from the Kuala Lumpur stock exchange (KLSE), and country’s gross domestic product (GDP) as the indicator of economic growth (dependent variable) from the ‘DataStream’ database. The Engle Granger Co-integration and the Granger Causality approaches were used to find out the long, as well as short-run and causality relationship between variables respectively. The empirical results suggest that there exists a long and shortrun correlation between stock market and economic growth; however, Granger Causality test suggests a unidirectional causality relationship.
7 citations
Dissertation•
01 Jan 2015
TL;DR: In this paper, the authors present a model of financial development and economic growth based on the theory of the back-ground of the economy and its economic models, including the Keynesian model, the Neoclassical model and the McKinnon-Shaw model.
Abstract: 1 ACKNOWLEDGEMENTS 4 DECLARATION 6 PUBLICATIONS, CONFERENCES AND AWARDS 7 List of Tables 12 List of Figures 14 1. CHAPTER ONE 15 INTRODUCTION 15 2. CHAPTER TWO 21 FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: THEORETICAL BACKGROUND 21 2.1. THEORETICAL FRAMEWORK 21 2.2. MODELS OF FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH 23 2.2.1. Keynesian Model 23 2.2.2. Neoclassical Model 24 2.2.3. The McKinnon-Shaw Model 26 2.2.4. Endogenous Finance and Growth Models 27 3. CHAPTER THREE 30 3.
6 citations
Cites background or result from "Does Financial Development Cause Ec..."
...The M3/GDP captures the amount of liquid liabilities of the financial system, including the liabilities of banks, central banks and other financial intermediaries, that reflects financial deepening, which is in turn positively related with financial services (King and Levine, 1993a/b; Demetriades and Hussein, 1996; Favara, 2003)....
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...Additional support for this view can be found in the empirical study by Demetriades and Hussein (1996), who studied 16 countries and found very strong evidence supporting bidirectional causality....
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...…it has been argued in the literature that M2/GDP might not be that good a proxy for financial development in the case of developing countries (e.g., Demetriades and Hussein, 1996; and Luintel and Khan, 1999) because currency held outside the banking system is a large component of the broad money…...
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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