Financial development, investment, and economic growth

Abstract

In this article, I use a multi¨ariate¨ector-autoregressi¨e VAR approach to examine the effects of permanent financial de¨elopment on domestic in¨estment and output in 41 countries between 1960 and 1993. The VAR approach permits the identification of the long-term cumulati¨e effects of financial de¨elopment on the domestic¨ariables by allowing for dynamic interactions among these¨ariables. The results reject the hypothesis that financial de¨elopment simply follows economic growth and has¨ery little effect on it. Instead, there is strong e¨idence that financial de¨elopment is important to growth and that in¨estment is an important channel Ž through which financial de¨elopment affects growth. JEL E22, E44, E47, O16, . O57

Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries

“…9 8 The demand-following role of the financial sector is emphasised also by Robinson (1952) and Kuznets (1955). This view has also been endorsed by the empirical studies of Al-Yousif (2002) and Ang and McKibbin (2007), while Xu (2000) rejects this hypothesis. 9 Calderon and Liu (2003) test the direction of causality between financial development and growth for a pooled dataset of 109 countries for 1960 to 1994 and find evidence of bi-directional causality between those variables using the Geweke decomposition test.…”

“…This is echoed by Gurley and Shaw (1955) and Goldsmith (1969), who argue that more developed financial markets promote economic growth by mobilizing savings to finance the most productive investments. In a more recent study, Xu (2000) finds strong evidence that financial development, primarily via the investment channel, affects growth positively.…”

“…As the financial system becomes larger relative to GDP, the increase in risk become relatively more important, and acts to reduce stability. 13 Some earlier literature has also suggested that the effect of finance on growth is stronger for more developed countries: see for example, Demetriades and Hussein (1996), Odedokun (1996), and Xu (2000). considered by Law et al (2013), but they attempt to identify the institutional quality thresholds that may affect the finance-growth relationship.…”

Financial development and economic growth in the Middle East

“…On the other hand, the expansion of financial institutions may help to foster and lead economic growth by increasing savings and improving borrowing options and the reallocation of capital. Evidence supporting this view can be found in Beck et al (2000), Xu (2000); Levine et al (2000); Neusser and Kugler (1998); Levine (1997); and King and Levine (1993) to point a few.…”

Quantile Parameter Heterogeneity in the Finance-Growth Relation: The Case of OECD Countries

“…The studies based on time-series analysis show that financial and stock market development have a significant effect on economic growth and a shock to financial development has a positive impact on economic growth. (Andini, 2009;Ang, 2009;Ang and McKibbin, 2007;Arestis and Demetriades, 1997;Arestis et al, 2001;Bell and Rousseau, 2001;Blanco, 2009;Caporale, Howells, and Soliman, 2005;Choe and Moosa, 1999;Coccorese and Silipo, 2014;Demetriades and Hussein, 1996;Demetriades and Luintel, 1996, 1997Federici and Caprioli, 2009;Fung, 2009;Ben Jedidia, Boujelbene, and Helali, 2014;Jung, 1986;Khalifa Al-Yousif, 2002;Khater Arabi, 2014;Luintel et al, 2008;Luintel and Khan, 1999;Masoud and Hardaker, 2012;Neusser and Kugler, 1998;Odedokun, 1996;Owen and Temesvary, 2014;Rousseau and Vuthipadadorn, 2005;Shan, Morris, and Sun, 2001;Thangavelu and Beng Jiunn, 2004;Vazakidis and Adamopoulos, 2009;Wen, 2009;Xu, 2000).…”