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.

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For many years economists have argued that the money supply is endogenously determined. However, it has often been suggested that monetary regimes differ in important institutional respects and it may be that endogeneity may be true for some regimes and not for others. The aim of this paper is to test for endogeneity of money supply in the G7 countries and also to detect the existence of any interaction between the demand for bank lending and the demand for money by using recently developed techniques of causality tests. Our findings suggest that broad money is endogenous. However, the ability of the demand for loans to cause deposits is not, it seems, unconstrained by the demand for those deposits. Agents do not simply absorb whatever flow of new deposits loans might create.

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