Problem statement: This study investigated the causal relationship between stock market development and economic growth for France for the period 1965-2007 using a Vector Error Correction Model (VECM). Questions were raised whether stock market development causes economic growth or reversely taking into account the negative effect of interest rate. Stock market development is estimated by the general stock market index. The objective of this study was to examine the causal relationships between these variables using Granger causality tests based on a Vector Error Correction Model (VECM). Approach: To achieve this objective unit root tests were carried out for all time series data in their levels and their first differences. Johansen co-integration analysis was applied to examine whether the variables are co-integrated of the same order taking into account the maximum eigenvalues and trace statistics tests. A vector error correction model was selected to investigate the long-run relationship between stock market development and economic growth. Finally, Granger causality test was applied in order to find the direction of causality between the examined variables of the estimated model. Results: A short-run increase economic growth of per 1% leaded to an increase of stock market index per 0.24% in France, while an increase of interest rate per 1% leaded to a decrease of stock market index per 0.64% in France. The estimated coefficient of error correction term found statistically significant with a negative sign, which confirmed that there was not any problem in the long-run equilibrium between the examined variables. The results of Granger causality tests indicated that economic growth causes stock market development in France. Conclusion: Therefore, it can be inferred that economic growth has a positive effect on stock market development, while interest rate has a negative effect on stock market development in France

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Problem statement:This study investigated the relationship between credit market development and economic growth for Italy for the period 1965-2007 using a Vector Error Correction Model (VECM). Questions were raised whether economic growth spurs credit market development taking into account the negative effect of inflation rate on credit market development. This study aimed to investigate the short-run and the long-run relationship between bank lending, gross domestic product and inflation rate applying the Johansen cointegration analysis. Approach: For this objectives unit root tests were carried out according to Dickey-Fuller (1979) and Johansen cointegration analysis was applied to examine whether the variables are cointegrated of the same order taking into account the maximum eigenvalues and trace statistics tests. Finally, a vector error correction model was selected to investigate the long-run relationship between economic growth and credit market development. Results: A short-run increase of economic growth per 1% induces an increase of bank lending 0.4% in Italy, while an increase of inflation rate per 1% induces a relative decrease of bank lending per 0.5% in Italy. The estimated coefficient of error correction term is statistically significant and has a negative sign, which confirms that there is not any a problem in the long-run equilibrium between the examined variables. Conclusions: The empirical results indicated that economic growth has a positive effect on credit market development, while inflation rate has a negative effect. Bank development is determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.

Problem statement:This study investigated the causal relationship between financial development and economic growth for Greece for the period 1978-2007 using a Vector Error Correction Model (VECM). Questions were raised whether financial development causes economic growth or reversely taking into account the positive effect of industrial production index. Financial market development is estimated by the effect of credit market development and stock market development on economic growth. The objective of this study was to examine the causal relationships between these variables using Granger causality tests based on a Vector Error Correction Model (VECM). Approach: To achieve this objective unit root tests were carried out for all time series data in their levels and their first differences according to Dickey-Fuller (1979). Johansen co-integration analysis was applied to examine whether the variables are co-integrated of the same order taking into account the maximum eigenvalues and trace statistics tests. A vector error correction model was selected to investigate the long-run relationship between financial development and economic growth. Finally, Granger causality test was applied in order to find the direction of causality between the examined variables of the estimated model. Results: A short-run increase of stock market index per 1% leaded to an increase of economic growth per 0.06% in Greece, also an increase of bank lending per 1% leaded to an increase of economic growth per 0.14% in Greece, while an increase of productivity per 1% leaded to an increase of economic growth per 0.32% in Greece. The estimated coefficient of error correction term found statistically significant with a negative sign, which confirmed that there was not any problem in the long-run equilibrium between the examined variables. The results of Granger causality tests indicated that economic growth causes stock market development and industrial production index, while industrial production index causes credit market development for Greece. Conclusions: Therefore, it can be inferred that economic growth has a positive effect on stock market development and credit market development through industrial production growth in Greece.

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