The Causality Direction of the Stock Market–Growth Nexus: Application of GMM Dynamic Panel Data and the Panel Ganger Non-causality Tests

Abstract

This study is an attempt to model the linkages between stock market development and economic growth in developed and emerging markets. The causality direction between stock market development and economic growth has also been examined in order to provide solid policy implications. Mainly, the relationship and direction of causality between stock market development and economic growth were tested using dynamic panel data analysis based on the Generalised Methods of Moment (GMM) and panel Granger non-causality, respectively. Additionally, panel unit root tests were also applied to check the stationary of the selected variables to avoid misleading results. The study focuses on 20 countries, both developed and emerging markets, and data were collected over the period 1990–2014 mainly from World Bank data series. Dynamic panel data analysis confirms that there is a statistically significant relationship between stock market development and economic growth in both developed and emerging markets. Further, the study emphasises that only the finance-led growth hypothesis is valid for emerging markets while developed markets support bidirectional causality between stock market development and economic growth, reflecting the existence of both the finance-led growth hypothesis and the growth-led finance hypothesis. Hence, it is crucial to formulate appropriate policies to shift unproductively allocated funds towards stock markets to meet long-term capital requirements to encourage higher economic growth. JEL Classification: C230, C220, G100, E010

The relationship between trade openness, financial development and economic growth: Evidence from Generalized method of moments

“…. In addition, per capita income is also a common factor in growth regressions and the current study observed a positive relationship between the GDP per capita income and market-based financial development which is consistent with the findings of Deyshappriya (2016), Banda (2005), Beck and Levine (2004), Levine (1993) and Osinubi (2002) and (Moyo, Khobai, Kolisi, & Mbeki, 2018). This is also consistent with the argument that welldeveloped domestic financial sectors in countries contribute significantly to economic growth.…”

“…Furthermore, stock market development also assists in capital accumulation which can allow small investors which invest financial assets in the capital markets such as investment in bonds, stocks and debenture. According to the results of this study, a well preforming and development of stock market is a key indicator of macroeconomic development because it can motivate domestic and foreign investors for investment into the country which is an energizer for industrialization (Cosķun et al 2017;2016;Petros 2012);Pohoa¸tă et al Cooray 2010). According to the results, market based financial indicators positively affects economic development in Asians markets of four south Asian countries (Pakistan, India, Bangladesh and Sri Lanka).…”

“…Conversely, inflation has become an insignificant factor in explaining economic growth. Ireland (1994) and (Deyshappriya, 2016) also obtained the insignificant results, and stressed that the impact of inflation on economic growth is considerably low, and may die out entirely in the long run.…”

The effect of Foreign direct investment and financial development on economic growth: Evidence from global income countries

“…it has been also considered that the country openness is essential source for augmenting economic growth by different researchers such as author (Thorsten Beck & Levine, 2004), (BANDA, 2005), (R. Levine & Zervos, 1998). Similar result of trade openness is found by (Deyshappriya, 2016) and (Mamingi & Martin, 2018) which reinforced our study findings for trade openness. According to an author, Banda (2005) who states that the level of freed trade and liberalization of economic augment the efficient allocation of an economy which in hence upsurge economic growth.…”

“…However, inflation has become an insignificant factor in explaining economic growth in other models which indicates that higher inflation rates as an indicator of macroeconomic condition lowers the economic performance of the countries. Deyshappriya (2016) has also got the negative impact which statutes that inflation effect economic growth considerably low and it may die at the time completely in long run. Inflation is one of the critical parameters concerning policy decisions of a country government.…”