Do Both Demand-Following and Supply-Leading Theories Hold True in Developing Countries?

Abstract

Acknowledgement:The authors are grateful to the Editor, Eugene Stanley, and seven anonymous referees for constructive comments and suggestions that led to a significant improvement of an early manuscript. The third author would like to thank Robert B. AbstractTo overcome the limitations of the traditional approach which uses linear causality to examine whether the supply-leading and demand-following theories hold. As certain countries will be found not to follow the theory by using the traditional approach, this paper first suggests using all the proxies of financial development and economic growth as well as both multivariate and bivariate linear and nonlinear causality tests to analyze the relationship between financial development and economic growth. The multivariate nonlinear test not only takes into consideration both dependent and joint effects among variables, but is also able to detect a multivariate nonlinear deterministic process that cannot be detected by using any linear causality test. We find five more countries in which the supply-leading hypothesis and/or demand-following hypothesis hold true than with the traditional approach. However, there is still one country, Pakistan, for which no linear or nonlinear causality is found between its financial development and economic growth.To overcome this limitation, this paper suggests including cointegration in the analysis. This leads us to conclude that either supply-leading or demand-following hypotheses or both hold for all countries without any exception. There will be some types of relationships between economic growth and financial development in any country such that either they move together or economic growth causes financial development or financial development causes economic growth without any exception. The finding in our paper is may be useful for governments, politicians, and other international institutions in their decision making process for the development of the countries and reducing poverty.JEL classification: G20; O40; C12

Do both demand-following and supply-leading theories hold true in developing countries?

“…We now present more detailed information on nonlinear causality for the first financial development proxy as follows: There is strong evidence of a bidirectional nonlinearly Granger relationship between economic growth and the first financial development proxy for Chile. We summarize the results of our bivariate linear and nonlinear causality tests in Table 11, reader may refer to Chow, Vieito, and Wong (2018) for Table 11.…”

“…, reader may refer toChow, Vieito, and Wong (2018) forTable 2. From the table, thehypothesis of having a unit root in the original (level) series of the first financial development proxy (M), the second financial development proxy (D) and the economic growth proxy (Y) are not rejected for all countries.…”

“…suggests that a cointegration relationship between the first financial development proxy (M) and the economic growth proxy (Y) exists for Chile, China, South Africa, and Sri Lanka whileTable 4(reader may refer toChow, Vieito, and Wong (2018) forTable 4) suggests that a cointegration relationship between the second financial development proxy (D) and the economic growth proxy (Y) exists for Pakistan, South Africa, and Turkey at ten percent significant level. The results are consistent with those from the Johansen cointegration test.…”

Optimal Solution Techniques in Decision Sciences: A Review

“…The SD theory can be used in many areas, including indifference curves (Wong, 2006(Wong, , 2007Ma and Wong, 2010;Broll, Egozcue, Wong, and Zitikis, 2010), two-moment decision model (Broll, Guo, Welzel, and Wong, 2015;Guo, Wagener, and Wong, 2018), moment rule (Chan, Chow, Guo, and Wong, 2018), economic growth (Chow, Vieito, and Wong, 2018), diversification Egozcue, Fuentes García, Wong, and Zitikis, 2011;Lozza, Wong, Fabozzi, and Egozcue, 2018). It can also be applied to many different assets, including stock (Fong, Lean, and Wong, 2008), fund Zumwalt, 2007, 2012;Wong, Phoon, Lean, 2008), futures (Lean, McAleer, Wong, 2010;Lean, Phoon, Wong, 2012;Qiao, Clark, Wong, 2012;Qiao, Wong, Fung, 2013;Lean, McAleer, Wong, 2015;Clark, Qiao, Wong, 2016), Warrant (Chan, de Peretti, Qiao, Wong, 2012;Wong, Lean, McAleer, Tsai, 2018), Option (Abid, Mroua, and 2009), wine (Bouri, Gupta, Wong, and Zhu, 2018), warrants (Chan, de Peretti, Qiao, and Wong, 2012), gold Zhu, 2015, 2018;Hoang, Zhu, El Khamlichi, and Wong, 2019) , property market (Qiao, Wong, 2015;Tsang, Wong, Horowitz, 2016).…”

“…All the above models are be related to decision sciences and can use the approaches discussed in our paper to get optimization solutions. Literature of applying unit root, cointegration, causality and nonlinearity tests includes Wong, Penm, Terrell, and Lim (2004), Wong, Khan, and Du (2006), Qiao, Liew, and Wong (2007), Foo, Wong, and Chong (2008), Qiao, Smyth, and Wong (2008), Qiao, Chiang, and Wong (2008), Chiang, Qiao, and Wong (2009), Qiao, McAleer, and Wong (2009), Qiao, Li, and Wong (2011), Vieito, Wong, and Zhu (2015, Batai, Chu, Lv, Wong (2017), Chow, Cunado, Gupta, Wong (2018), Chow, Vieito, Wong (2018), Zhu, Bai, Vieito, Wong (2018), Demirer, Gupta, Lv, Wong (2019), Chow, Gupta, Suleman, Wong (2019), and many others.…”