Financial Development and Economic Growth

Abstract

The relationship between financial development and economic growth has been the subject of considerable debate in development and growth literature. Therefore this chapter provides evidence on the role of financial development in accounting for economic growth in 23 OECD countries (Italy, Japan, Luxemburg, Holland, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, England, USA, Australia, Austria, Belgium, Canada, Denmark, Finland, Turkey, France, Germany, Greece, Iceland) via panel data analysis using the annual data for the period 1980-2012. The authors find a positive relationship between financial development and economic growth for all countries. Also this result means that financial development leads economic growth in these countries. So the results may help policymakers formulate effective financial sector policies as a tool to promote economic growth.

The Impact of Financial Sector Development and Sophistication on Sustainable Economic Growth

“…Our findings are consistent with other relevant previous studies that confirm a positive impact of financial development on economic growth (Rana and Barua [34], Mercan and Gocer [35], Eryilmaz et al [37], Krozner et al [43]). However, our empirical findings proved that some indicators associated with the financial system development dimension have an inconclusive impact (consistent with Andini and Andini [44], Samargandi and others [45], Bangake and Eggoh [46]).…”

“…Our methodology is consistent with the following previous studies: Rana and Barua [34] used panel regression and tested the impact on economic growth (proxied by GDP growth rate) of five variables selected for financial development (Domestic Credit Provided by Financial Sector, Total Debt Services, Gross Domestic Savings, Broad Money, and Trade Balance); Mercan and Gocer [35] used panel regression on five developing countries with data covering 1989-2010 to test the influence of financial development (proxied only by M2 to GDP) on the GDP growth rate and used foreign direct investments to GDP and total foreign trade to GDP (exports + imports) as controlling variables; Fufa and Kim [36] used dynamic GMM panel regression on 64 countries with data covering 1989-2012, the impact of the stock markets (described by the value of the traded shares divided by the total value of listed share, the value of all domestic shares traded in the stock market divided by GDP and the total value of listed shares in the stock market divided by GDP) and the banking system (deposit money banks to the private sector as a share of GDP, credit issued by deposit banks and other financial institutions, excluding central banks, to the private sector divided by GDP and by broad money M3 to GDP) on economic growth estimated by the real per capita GDP growth rate; Eryılmaz and others [37] applied panel data regression on 23 OECD countries using GDP per capita as the dependent variable and the ratio of domestic total credit to GDP and ratio of total domestic savings to GDP as a financial development indicator (independent variable); and Chen and others [38] investigated the impact of financial inclusion (decomposed by four dimensions: availability of financial services, usability of financial services, utility of financial services and receptivity of financial services) on the non-performing loans rate using a panel data regression in 31 provinces of China with data covering 2005-2016.…”

The Nexus between Financial Development and Economic Growth in China

“…Based on Arrow and Hurwicz (1962) endogenous growth model focuses on a knowledge-based economy's positive externalities and spillover effects ultimately lead to economic development. Moreover, endogenous growth hypothesis explains that economic growth driven by human capital, technology, and knowledge greatly leads to economic growth by means of transparency, rivalry and creativity policies and support by government (Eryılmaz et al, 2015;Howitt & Aghion, 1998). However, theory of neoclassical exogenous growth has adopted the basic neoclassical framework of long-term economic growth which is known as Solow-Swan growth model (Solow, 1956).…”

“…Financial development playing role as financial securities, financial markets and capital intermediaries are reduced by offering financial functions without necessarily eliminating the information gathering costs, contract execution costs and transaction costs (Levine, 2004). Moreover, Financial development reducing the risks of the financial system and the cycle of increasing data acquisition costs, agreement compliance, and deal completion resulted in financial agreements, intermediaries, and industries developing (Eryılmaz et al, 2015). Asteriou and Spanos (2019) suggested financial development promoted economic growth while adversely affecting economic activity in times of crisis.…”

Nexus of regional integration, socioeconomic determinants and sustainable development in belt and road initiative countries

“…Eryılmaz, Bakır [ 20 ] emphasize the need for an efficient regional system to help achieve sustainable development. The regional integration link of BRI to sustainable development has not been explored much [ 21 ].…”