...Literature review 1 1.2. Theoretical review of financial development and economic growth nexus 1 1.3 Review of the empirical literature 4 1.3.1 Time series 5 1.3.2 Cross-country studies 6 1.3.3 Panel data studies 7 3 Conclusions 8 4 References 9 1 Introduction “Finance is powerful. The financial system can be an engine of economic prosperity – or a destructive cause of economic decline and misery.” Levine, R. (2011) p.85 Obviously, financial system and economy are related. But what is the nature of this relationship? The objective of this paper is to critically evaluate the existing theoretical and empirical literature on the finance-growth nexus. What is the role of the financial sector in economic growth? Does finance cause growth or simply follows it? There is no wide agreement about this task among recognised economists. Even Nobel Prize winners disagree in regard to the role of finance in economic development. Levine (2003) states that the role of finance as a major determinant of economic growth is over-stressed. Moreover Levine (2003) argued that where enterprise leads finance follows. Quite the opposite, important acknowledgment should be taken into account and it follows as “[the idea] that financial markets contribute to economic growth is a proposition too obvious for serious discussion.” Levine (2003) p.1 Similar to that, he also declared that the finance growth nexus cannot be safely ignored without substantially...
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...serta peningkatan pesat inovasi kewangan dalam ekonomi berasaskan kredit boleh mempengaruhi pertumbuhan ekonomi di sesebuah negara. Ini yang menjadikan peranan sektor kewangan terhadap pertumbuhan ekonomi sering menimbulkan perdebatan di kalangan ahli-ahli ekonomi. Misalnya Miller (1998) yang menyatakan bahawa sektor kewangan telah dilebih-nyatakan(over-stressed) terhadap pertumbuhan ekonomi. Manakala, ahli ekonomi lain seperti Schumpeter (1911) dan Mikinnon (1973) yang menggunakan pelbagai kaedah ekonometrik telah memberikan kesimpulan yang sama, iaitu sektor kewangan adalah penting untuk mempengaruhi kegiatan ekonomi di sesebuah negara. Pandangan ini menyokong hipotesis sektor kewangan mendorong pertumbuhan ekonomi (finance leading growth) atau dikenali sebagai hipotesis dorongan penawaran. Ini bererti pembangunan sektor kewangan adalah pra-syarat kepada perkembangan kegiatan ekonomi. Sebaliknya, jika pembangunan...
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...Introduction In modern economic society, while the global countries economic become more and more integrated, each member country focuses on the financial developments and economic growth, so that they can occupy one position in the modern competitive economic environment. Financial development involve lots of factors, including producing information about possible investments and allocating capital; monitoring the firm performance and corporate governance; trading, diversification, and management of risk; mobilization and pooling of savings; and easing the exchange of goods and service. Usually the financial development level is primarily determined by the local institutional quality, the extent of government police, geographic elements, native income level and cultural tradition. These factors formed the economic environment in which the banks and other financial firms to make decision for investment project and exogenous financing, furthermore, the customers decide whether consumption or saving, moreover, the financial intermediaries finance the fund in which approach from savers to borrowers. The well financial system can perfect the effect of information, enforcement and transaction cost on the saving rate, investment decision and technological innovation, and steady state growth rate. Financial market channel the fund to investment opportunities to get the profit, so if the financial system cannot work well, the economic growth also more or less affected. The essay mainly...
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...STOCK MARKET DEVELOPMENT ON THE MALAYSIAN ECONOMIC GROWTH: AN EMPIRICAL INVESTIGATION BY HAFSAH AHMAD A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA MAY 2005 1 ABSTRACT This study investigates the long-run relationship between financial development (banking sector and stock market development) and economic growth in Malaysia. Six variables based on Malaysian quarterly data from 1978:1 to 2002:4 are employed, namely real GDP per capita, investment rate and ratios of credit, deposit, market capitalization, and value of shares traded to GDP. Two dynamic frameworks are adopted - Vector Auto regression (VAR) with error correction formulation for causality analyses and dynamic OLS (DOLS) procedure for estimation of growthfinance long-run relation. Causality analyses show that there is bi-directional causality between financial development (banking sector and stock market development) and economic growth. Analyses on growth-finance long-run relations indicate that banking sector development and stock market development individually have an independent positive effect on long-run economic growth. They enhance economic growth through both channels – the volume and efficiency of investment, with the latter being the main source of their independent effect. The study also shows that banking sector development and stock...
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...CORRELATIONS BETWEEN CAPITAL MARKET DEVELOPMENT AND ECONOMIC GROWTH: THE CASE OF ROMANIA1 Laura OBREJA BRASOVEANU PhD, Associate Professor, Finance Departament, University of Economics, Bucharest, Romania E-mail: laura_obreja@yahoo.com Victor DRAGOTA2 PhD, University Professor, Finance Departament, University of Economics, Bucharest, Romania E-mail: victordragota@yahoo.com, victor.dragota@fin.ase.ro Delia CATARAMA PhD Candidate, Assistant Professor, Finance Departament, University of Economics, Bucharest, Romania E-mail: delia.catarama@fin.ase.ro Andreea SEMENESCU3 PhD Candidate, University Assistant, Finance Departament, University of Economics, Bucharest, Romania E-mail: asemenescu@yahoo.com Abstract: In the literature on endogenous growth, the link between capital markets development and economic growth has received much attention. Although there are many studies regarding this aspect, approaches on emergent ex-communist countries’ economies, especially for Romania, are very few comparatively to the general cases. Our paper examines the correlation between capital market development and economic growth in Romania using a regression function and VAR models. The results show that the capital market development is positively correlated with economic growth, with feed-back effect, but the strongest link is from economic growth to capital market, suggesting that financial development follows economic growth, economic growth determining financial institutions to change and develop...
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...Environment, Banks, and Long-Run Economic Growth: Comment. Journal of Money Credit and Banking, 30, 3, 614-620. Ang, J.B., and Mckibbin, W.J. (2007). Financial Liberalization, Financial Sector Development and Growth: Evidence from Malaysia. Journal of Development Economics, 84(1), 215-233. Arcand, J., Berkes, E., Panizza, U. (2012), Too Much Finance? International Monetary Fund.Research Department. Asteriou, D., & Monastiriotis, V. (2004). What do unions do at the large scale? Macro-economic evidence from a panel of OECD countries. Journal of Applied Economics, VII(I), pp. 27-46. Arellano, M. (2003): Panel Data Econometrics, Oxford University Press. Arellano, M., and O. Bover. (1995). Another Look at The Instrumental Variable Estimation of Error- Components Models. Journal of Econometrics, 68, 29-52. Arellano, M., & Bond, S. R. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies (new York), 58, 194, 277- 297. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 1, 115-143. Baltagi, B. (2008). Econometric analysis of panel data, John Wiley and Sons, Chichester. Baltagi, Gri, and Xiong (2000). To Pool or Not To Pool: Homogeneous Versus Heterogeneous Estimators Applied to Cigarette Demand. Review of Economics and Statistics 82: 117. Barro, R.J. (1991). Economic Growth in a Cross Section of Countries...
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...Abstract Financial intermediation is an important activity in the economy because it allows funds to be channeled from people who might otherwise not put them to productive use to people who will ultimately put the funds to productive uses. In line with the assumption that banking sector plays an important role in financing the investment projects, successive governments in Nigeria have carried out reforms and institutional innovations in the banking sector. The overall intention of these reforms has been to ensure financial stability so as to influence the growth of the economy and also enhance banks to play a critical role of financial intermediation in Nigeria. However, despite the fact that Nigerian banks have undergone series of restructuring/reforms aimed at strengthening the banks’ ability to efficient service delivery and fund the real sector, problems such as; inefficiency in allocating funds to the real sector, lack of long-dated funding, neglect of the core private sector in terms of credit extension, weak capacity of the banks to fund the real sector, low-level activities of banks, and illiquidity still lingers. This study therefore, examines empirically the impact of financial intermediation on the development of the Nigerian economy with the aim of determining the importance of financial intermediaries and its influence. This study found out that the financial intermediaries (banks) in Nigeria exhibit inefficiency and weak capacity in the allocation of funds to...
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...THE GROWTH EFFECTS OF FINANCIAL LIBERALISATION PROGRAMME IN EGYPT: DEVELOPMENTS AND DRAWBACKS (Key Words: financial liberalisation, economic growth, Egypt) DR. Ayman M. Ebrahim Faculty of Commerce and Business Administration Helwan University Ein Helwan , Cairo E-mail: ahendy@ksu.edu.sa hendyayman@hotmail.com ABSTRACT The paper begins with a review of theory and recent empirical evidence relating to financial liberalisation and economic development. Among the countries that underwent financial liberalisation programmes in the 1990s, Egypt appears to have performed well. Although the internal and external shock to the economy and the associated drawbacks in the financial liberalisation programme, over the past decade, which brought the experience of financial liberalisation, the Egyptian economic performance improved. Its aggregate growth rate was positive and macroeconomic variables moved in a favourable direction in accordance with the predictions of the financial liberalisation paradigm. The econometric test specification follows the nonlinear least-squares estimations methodology to test the co-movement of the underlying variables. INTRODUCTION The financial liberalisation paradigm encourages nominal interest rate liberalisation, the reduction or abolition of reserve requirements, the elimination of inflationary finance, the removal of other forms of taxation on...
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...Review of Development Economics, 9(2), 166–176, 2005 Endogenous Growth Models and Stock Market Development: Evidence from Four Countries Guglielmo Maria Caporale, Peter Howells, and Alaa M. Soliman* Abstract This paper re-examines the relationship between stock market development and economic growth. It provides a theoretical basis for establishing the channel through which stock markets affect economic growth in the long run. It examines the hypothesis of endogenous growth models that financial development causes higher growth through its influence on the level of investment and its productivity. The empirical part of this study exploits techniques recently developed to test for causality in VARs. The evidence obtained from a sample of four countries suggests that investment productivity is the channel through which stock market development enhances the growth rate in the long run. 1. Introduction Several theoretical and empirical papers such as Levine (1991), Levine and Zervos (1995), Demirguc-Kunt (1994), Demirguc-Kunt and Levine (1995), Rousseau and Wachtel (2000) and Beck and Levine (2003), have suggested that stock market development affects economic growth in developing countries. The common problem with these studies, however, is that there is no discussion of the channels through which stock markets can stimulate economic growth. In traditional growth theory, the growth rate is a positive function of exogenous technical progress. However, financial development is not...
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...role of development finance in economic development in Sub-Saharan Africa. Development Finance is practice of using scarce financial resources in an unconventional ways in order to advance economic activity(ies). According to (Nyembezi, 2009), development finance makes the economy run smoothly and effectively. The aim of the development finance is to look at the challenges and design the framework as well as stimulating core activities that will develop the economic growth. As stated by (Nyembezi, 2009) development finance, in an economy, can be compared to oil in a vehicle engine that ensures its sound and smooth operation. According to (Ocran, 2012), development finance is concerned with the financing of development at: • Household level • Firm level • Geographical area/national/regional level This paper looks at the role of development finance at national and regional level in economic development in Sub-Saharan Africa. The Organisation for Economic Co-operation and Development (2002) defines development finance officially as funding “used in measuring the inflow of resources to recipient countries: including (a) bilateral official development assistance (ODA), (b) grants and concessional and non-concessional development lending by multilateral financial institutions, and (c) Other Official Flows for development purposes (including refinancing Loans) which have too low a Grant Element to qualify as ODA”. The role of development finance and economic growth The current...
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...Please cite this note as: OECD (2014), “OECD forecasts during and after the financial crisis: A Post Mortem”, OECD Economics Department Policy Notes, No. 23 February 2014. OECD FORECASTS DURING AND AFTER THE FINANCIAL CRISIS: A POST MORTEM OECD Economics Department Policy Note no. 23 February 2014 This Policy Note is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. © OECD 2014 You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable acknowledgment of OECD as source and copyright owner is given. All requests for public or commercial use and translation rights should be submitted...
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...CHAPTER ONE INTRODUCTION 1.1 Background To The Study The financial system is created to move funds from surplus economic units to deficit economic units in order to produce goods and services and to make investment in new equipment and facilities so as to facilitate the growth of the economy and improve the standard of living of its citizens. It is generally recognized that financial system plays a catalytic role in the process of economic development. The financial system of any nation is a function of the size of its economy. A growing economy places more responsibilities on the financial sector to mobilize the needed capital to facilitate production, generate employment and income. An economy that does not experience growth on sustained basis is likely to have a very passive financial sector as there are no incentives for investment. Through the process of growth, financial system offers a wide range of portfolio options for savers and issuable instruments for investors, a function often referred to as financial intermediation (Oke, 2000). The Nigerian financial system comprises of various institutions, markets and operations that are in the business of providing financial services. These institutions can be broadly categorized into money and capital markets. While money market is a market in which short term financial instruments are traded, the capital market on the other hand deals with long term transactions. The major players in the money market are the banks and discount...
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...Journal of Economics and Finance Vol. 3, No. 2; May 2011 Development of Financial Market and Economic Growth: Review of Hong Kong, China, Japan, The United States and The United Kingdom Anson Wong (Corresponding author) School of Accounting and Finance The Hong Kong Polytechnic University Tel: 852-2766-7866 E-mail: afanson@inet.polyu.edu.hk Xianbo Zhou Department of Economics Lingnan College, SUN YAT-SEN University, China E-mail: zhouxb@mail.sysu.edu.cn Received: July 20, 2010 Accepted: January 13, 2011 doi:10.5539/ijef.v3n2p111 Abstract The empirical evidence suggests that the development of stock markets in China, USA, United Kingdom, Japan and Hong Kong have independently a strongly positive correlation with their economic growth. The result brings out an important theory to support for the proposition that the stock market development is one of the key drivers of economic growth in developed and developing countries, whatever the modes of their financial systems, stage of their economic development and types of economic system. Keywords: Development of Stock Market, Economic Growth, China, Japan, United Kingdom, USA, Hong Kong 1. Introduction Numerous studies have proposed that the development of stock market is able to improve growth performance through its positive effects on capital flows, diversification of investment risk and pooling funding for the long-term industrial projects and provision of adequate liquidity. Development of financial...
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...DOES FINANCIAL SECTOR DEVELOPMENT INCREASE INCOME INEQUALITY? SOME ECONOMETRIC EVIDENCE FROM BANGLADESH Abu N.M. Wahid Tennessee State University Muhammad Shahbaz COMSATS Institute of Information Technology, Lahore, Pakistan Mehmood Shah University of Management and Technology, Lahore, Pakistan Mohammad Salahuddin Southeast University Banani, Dhaka, Bangladesh ABSTRACT This paper is an attempt to examine the relationship between financial development and income inequality. In doing so, we have used Bangladeshi data for the period 1985-2006. We have employed auto-regressive distributed lag (ARDL) methodology for cointegration. We have also carried out sensitivity analysis and stability tests. Our findings suggest that financial development increases income inequality. Economic growth seems to equalize income distribution. Inflation and trade openness also worsen income inequality. Finally, income inequality is being increased by social spending in the country over long run. This study provides new directions for policy makers to reduce income inequality to share the fruits of economic development among the wider spectrum of the society. Keywords: Financial sector, development, trade openness, income inequality, Bangladesh JEL Classifications: D14, D33, F1 INTRODUCTION Economic growth and its correlates have been the focus of a large number of studies over the recent past. These studies primarily put emphasis on various aspects or sources of growth. One...
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...Financial Markets, Insurance and Entrepreneurship in the countries of the Middle East and North Africa (MENA) region Draft not to be cited February 27, 2013 1. Introduction The goal of the paper is to focus on the countries of the Middle East and North Africa (MENA) region and particularly those of the of the South of the Mediterranean, and examine the relationship between insurance – defined as the capability of covering the cost of future harmful events-and entrepreneurship broadly defined as the capability to start independent businesses activities and possibly introduce new combinations of productive factors. The analysis is based on the distinction between uncertainty and risk that Knight unveiled (Knight, 2012) arguing that risk involves situations where a decision maker face unknown outcomes but known ex-ante probability distributions, while uncertainty is characterized by situations in which the probability distribution of a random outcome is unknown. Consequently, while risk can be covered by insurance, uncertainty normally is not. The other pillar of this research is the role of entrepreneurship; a factor that the economic literature has not considered for long time and that in the last 20 years has become the center of any strategy for economic growth in emerging and advanced economies. The discovery of the role of entrepreneurs dates back to Schumpeter (Schumpeter, 1982a) who regards entrepreneurs as the engine of economic growth. Schumpeter (Schumpeter...
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