Does Financial Development Cause Economic Growth? The Case of India

doi:10.1177/139156140700900105

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Does Financial Development Cause Economic Growth? The Case of India

Journal Article•DOI•

Does Financial Development Cause Economic Growth? The Case of India

Indrani Chakraborty¹•Institutions (1)

Institute of Development Studies, Kolkata¹

01 Jun 2008-South Asia Economic Journal (SAGE Publications)-Vol. 9, Iss: 1, pp 109-139

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.

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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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Journal Article•

Comparing financial systems.

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Bert Scholtens

01 Jan 2000-Kyklos

603 citations

Posted Content•

FDI and economic growth: new evidence on the role of financial markets

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W.N.W. Azman-Saini¹, W.N.W. Azman-Saini², Siong Hook Law², Abd Halim Ahmad³•Institutions (3)

University of Southampton¹, Universiti Putra Malaysia², Universiti Utara Malaysia³

08 Jan 2009-Research Papers in Economics

TL;DR: In this paper, the authors used a threshold regression model and found new evidence that the positive impact of FDI on growth "kicks in" only after financial market development exceeds a threshold level.

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Abstract: This study uses a threshold regression model and finds new evidence that the positive impact of FDI on growth “kicks in” only after financial market development exceeds a threshold level. Until then, the benefit of FDI is non-existent.

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233 citations

Cites background from "Does Financial Development Cause Ec..."

...It measures the overall size of the financial system but may not accurately reflect the efficiency of the banking sector (Demetriades and Hussein, 1996)....
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Journal Article•DOI•

Financial Development and Economic Growth in the UAE: Empirical Assessment Using ARDL Approach to Co-integration

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Husam-Aldin Nizar Al-Malkawi, Hazem Marashdeh, Naziruddin Abdullah

23 Apr 2012-International journal of economics and finance

TL;DR: In this paper, the authors examined the relationship between financial development and economic growth in a small open economy of United Arab Emirates (UAE) using time series data from 1974 to 2008, and employed the autoregressive distributed lag (ARDL) approach to cointegration.

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Abstract: This paper empirically examines the relationship between financial development and economic growth in a small open economy of United Arab Emirates (UAE). Using time series data from 1974 to 2008, the study employs the autoregressive distributed lag (ARDL) approach to co-integration. The analysis is carried out using two indicators to measure the level of financial development. The first indicator is the financial depth or size of the financial intermediaries sector as measured by the monetization ratio (M2/GDP). The second indicator is the ratio of the credit provided to private sector by commercial banks as a percentage of the GDP (financial intermediation ratio). The results show a negative and statistically significant relationship between financial development, as measured by M2/GDP, and economic growth. The results also suggest a bi-directional causality between the two variables. Over all, the evidence supports neither the demand-following nor the supply-leading hypotheses for UAE.

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92 citations

Cites methods from "Does Financial Development Cause Ec..."

...This hypothesis has received support from numerous theoretical and empirical studies including Patrick (1966), Demetriades and Hussein (1996), Luintel and Khan (1999), Greenwood and Smith (1997), Al-Yousif (2002) and Calderón and Liu (2003), among others....
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The effect of microfinance factors on women entrepreneurs’ performance in Nigeria: a conceptual framework

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Razli Che Razak¹, Isidore Ekpe¹, Norsiah Mat¹•Institutions (1)

Universiti Utara Malaysia¹

01 Jan 2011

TL;DR: In this paper, the effect of credit, savings, training, and social capital on women entrepreneurs' performance in Nigeria was examined using Structural Equation Modeling (SEM).

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Abstract: Women play a crucial role in the economic development of their families and communities but certain obstacles such as poverty, unemployment, low household income and societal discriminations mostly in developing countries have hindered their effective performance of that role. As such, most of them embark on entrepreneurial activities to support their families. It is discovered that women entrepreneurship could be an effective strategy for poverty reduction in a country; since women are the worst hit in such situation. However, it is discovered that women entrepreneurs, especially in developing countries, do not have easy access to microfinance factors for their entrepreneurial activity and as such have low business performance than their men counterparts, whereas the rate of their participation in the informal sector of the economy is higher than males, and microfinance factors could have positive effect on enterprise performance. The objective of this study is to examine the effect of credit, savings, training and social capital on women entrepreneurs’ performance in Nigeria. The study involves a survey using structured questionnaire and an indepth interview to solicit responses from women entrepreneurs, and secondary data from microfinance institutions. Data analysis involves the use of Structural Equation Modelling.

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84 citations

Cites background from "Does Financial Development Cause Ec..."

...…and increases poverty level in a country; and studies worldwide have shown that low economic development and high poverty in a country is due to that country’s inability to develop her financial sector (Chakraborty, 2008; Iganiga, 2008; Stephen & Wilton, 2006; William & Thawatchai, 2008)....
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...Such distresses often hinder economic development and increases poverty level in a country; and studies worldwide have shown that low economic development and high poverty in a country is due to that country’s inability to develop her financial sector (Chakraborty, 2008; Iganiga, 2008; Stephen & Wilton, 2006; William & Thawatchai, 2008)....
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Journal Article•DOI•

Financial Development and Economic Growth in India An Analysis of the Post-reform Period

[...]

Indrani Chakraborty¹•Institutions (1)

Institute of Development Studies, Kolkata¹

01 Dec 2010-South Asia Economic Journal

TL;DR: In this article, the authors examined the impact of the developments in the financial sector on economic growth in India in the post-reform period and found that an increase in the market capitalization dampens economic growth, whereas turnover has no significant effect.

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Abstract: This article examines the impact of the developments in the financial sector on economic growth in India in the post-reform period. The model of Mankiw et al. (1992) was extended to establish a relationship between financial development and economic growth. The model was then estimated using quarterly data for the period 1993 to 2005 for India, using the techniques of cointegration and vector error correction method. Cointegration results show that capital–output ratio and rate of growth of human capital have positive effects on real rate of growth of GDP, irrespective of the indicator of stock market development. An increase in the market capitalization dampens economic growth, whereas turnover has no significant effect, and an increase in the money market rate of interest has a positive effect on economic growth. Real wealth, debt burden, real effective exchange rate and the rate of growth of labour have negative effects. Vector error correction method shows that the ECM term relating to market capitali...

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66 citations

Cites background or methods from "Does Financial Development Cause Ec..."

...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998). 5. Relating stock and credit market expansion with economic growth in five emerging markets, namely, India, South Korea, Chile, Mexico and Taiwan, Spyrou and Kassimatis (2001) observe that equity markets have a role to play in Chile and Mexico. On the other hand, in these two countries banking crises in the 1980s and 1990s resulted in a negative relation between economic growth and credit market. Development of the stock market in Chile and Mexico since the second half of the 1980s was also noted by Demirguc-Kunt and Levine (2001), where they identified these two countries among others as market-based economies on the basis of a structure index....
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...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998). 5. Relating stock and credit market expansion with economic growth in five emerging markets, namely, India, South Korea, Chile, Mexico and Taiwan, Spyrou and Kassimatis (2001) observe that equity markets have a role to play in Chile and Mexico....
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...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008)....
[...]
...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2. It may be noted that equation (1) would represent an endogenous growth model, subject to the condition of increasing return to capital which implies α + β = 1. We have tested this hypothesis by estimating equation (3) with OLS, considering both the quarterly data and annual data over the period 1993 to 2005. In both the cases the hypothesis of α + β = 1 is rejected against the hypothesis of α + β < 1. 3. For application of similar interpolation method, see Granville and Mallick (2003). For getting quarterly series from annual series they applied an interpolation method in which the new estimated quarterly series is supposed to be consistent with other quarterly series in the model. For this exercise, they first searched for a similar quarterly series and assumed that the quarterly movements of both the series were the same. 4. Zhu et al. (2004) control for outliers in the data set used by Levine and Zervos (1998) by using nine alternative specification show that the effect of stock market turnover on economic growth is not significant, which contrasts the findings of Levine and Zervos (1998)....
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...For a comprehensive review of empirical literature on financial development and economic growth see Chakraborty (2008). 2....
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Posted Content•

Financial Development and Economic Growth: An Overview

[...]

Mohsin S. Khan, Abdelhak S Senhadji

01 Dec 2000-Research Papers in Economics

TL;DR: This paper provided a selective review of the literature, as well as new empirical evidence on the relationship between financial development and economic growth for a large cross-section sample of countries and found that the effect of financial development on growth is positive.

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Abstract: In recent years there has been substantial theoretical and empirical work on the role that financial markets play in fostering economic growth and development. This paper provides a selective review of the literature, as well as new empirical evidence on the relationship between financial development and economic growth for a large cross-section sample of countries. While the results indicate that the effect of financial development on growth is positive, the size of the effect varies with different indicators of financial development, estimation method, data frequency, and the functional form of the relationship.

...read moreread less

224 citations

Journal Article•

Equity markets, transaction costs, and capital accumulation

[...]

Valerie R. Bencivenga, Bruce D. Smith, Ross M. Starr

31 May 1995-The World Bank Economic Review

TL;DR: In this paper, the authors address the question: how the efficiency of an economy's equity market, as measured by transaction costs, affects its efficiency in producing physical capital and, through this channel, final goods and services?

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Abstract: There is a close, if imperfect, relationship between the effectiveness of an economy's capital markets and its level (or rate of growth) of real development. This may be because financial markets provide liquidity, promote the sharing of information, or permit agents to specialize. There is literature about how these functions help increase real activity, but surprisingly little literature predicting how the volume of activity in financial markets relates to the level or efficiency of an economy's productive activity. The authors address this question: how does the efficiency of an economy's equity market -- as measured by transaction costs -- affect its efficiency in producing physical capital and, through this channel, final goods and services? The answer: As the efficiency of an economy's capital markets increases (that is, as the transaction costs fall), the general effect is to cause agents to make longer-term -- hence, more transction-intensive -- investments. The result is a higher rate of return on savings and a change in its composition. These general equilibrium effects on the composition of savings cause agents to hold more of their wealth in the form of existing equity claims and to invest less in the initiation of new capital investments. As a result, a reduction in transaction costs can cause the capital stock either to rise or fall (under scenarios described in the paper). Further, a reduction in transaction costs will typically alter the composition of saving and investment, and any analysis of the consequences of such changes must take those effects into account.

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82 citations