Financial development and economic growth: The case of eight Asian countries

Sinha, Dipendra and Macri, Joseph (2001): Financial development and economic growth: The case of eight Asian countries. Published in: Economia Internazionale , Vol. 54, No. 2 (2001): pp. 219-234.

Abstract

This paper looks at the relationship between financial development and economic growth using time series data for eight Asian countries. First, we estimate augmented production functions where a financial development variable is added. Second, we conduct multivariate causality tests between the growth rate of income and the growth rates of the financial development variables. The regression results show a positive and significant relationship between the income variables and financial variables for India, Malaysia, Pakistan and Sri Lanka. The multivariate causality tests show a two-way causality relationship between the income and the financial variables for India and Malaysia, one-way causality from financial variables to income variables for Japan and Thailand and reverse causality for Korea, Pakistan and Philippines. Thus, our empirical results do not unambiguously support the general view of a clear and positive relationship between financial development and economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: finanacial development; economic growth; Asian countries
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General

References

Ahmed, Syed-M and Ansari, Mohammed I (1998), “Financial Sector Development and Economic Growth: The South-Asian Experience.” Journal of Asian Economics, 9(3), pp. 503-17.

Ahmed, Syed-M and Ansari, Mohammed I (1995), “Financial Development in Bangladesh- A Test of the McKinnon-Shaw Model.” Canadian Journal of Development Studies, 16(2), pp. 291-302.

Bagehot, Walter (1873), Lombard Street. Homewood, IL: Irwin.

Bencivenga, Valerie R and Smith, Bruce D. (1991), “Financial Intermediation and Endogenous Growth.” Review of Economic Studies, 58(2), pp. 195-209.

Berthelemy, Jean-Claude and Varoudakis, Aristomene (1996), “Economic Growth, Convergence Clubs, and the Role of Financial Development.” Oxford Economic Papers, 48(2), pp. 300-328.

Berthelemy, Jean- Claude and Varoudakis, Aristomene (1998), “Financial Development, Financial Reforms and Growth: A Panel Data Approach.” Revue-Economique, 49(1), pp. 195-206.

De La Fuente, Angel and Marin, Jose Marias (1994), “Innovation, Bank Monitoring and Endogenous Financial Development.” Universitat Pompeu Fabra Working Paper, No.59.

Demetriades, Panicos and Hussein, Khaled (1996), “Does Financial Development Cause Economic Growth? Time Series Evidence from Sixteen Countries.” Journal of Development Economics, 51(2), pp. 387-411.

Demetriades, Panicos and Luintel, Kul B (1996), “Financial Development, Economic Growth and Banking Sector Controls: Evidence from India.” Economic Journal, 106(435), pp. 359-74.

Dickey, David A and Fuller, Wayne A (1979), “Distributions of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association, 74(Part I), pp. 427-31.

Dickey, David A and Fuller, Wayne A (1981), “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.” Econometrica, 49(4), pp. 1057-72.

Fry, Maxwell J (1988), Money, Interest and Banking in Economic Development, Baltimore: The Johns Hopkins University Press.

Galbis, Vicente (1977), “Financial Intermediation and Economic Growth in Less Developed Countries: A Theoretical Approach.” Journal of Development Studies, 13(2), pp. 58-72.

Goldsmith, Raymond W (1969), Financial Structure and Development. New Haven, CT: Yale University Press.

Granger, Clive W. J (1969), “Investigating Causal Relations by Econometric Models and Cross Spectral Methods.” Econometrica, 37(3), pp. 424-38.

Greenwood, Jeremy and Jovanovic, Boyan (1990), “Financial Development Growth, and the Distribution of Income.” Journal of Political Economy, 98(5, Pt.1), pp. 1076-1107.

Greenwood, Jeremy and Smith, Bruce D (1997), “Financial Markets in Development, and the Development of Financial Markets.” Journal of Economic Dynamics and Control, 21(1), pp. 145-81.

Gupta, Kanhaya L (1984), Finance and Economic Growth in Developing Countries, London: Croom Helm.

Gurley, John G., and Shaw, E.S (1955), “Financial Aspects of Economic of Economic Development.” American Economic Review, 45(4), pp. 515-38.

Hicks, John (1969), A Theory of Economic History, Oxford: Clarendon Press.

International Monetary Fund (1998) International Financial Statistics, CD-ROM version, November 1998.

Jayaratne, Jith and Strahan, Phillip (1996), “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 111(3), pp. 639-670.

Jung, Woo S (1986), “Financial Development and Economic Growth: International Evidence.” Economic Development and Cultural Change, 34(2), pp. 333-46.

Khan, Ashfaque H and Hasan, Lubna (1998), “Financial Liberalization, Savings, and Economic Development in Pakistan.” Economic Development and Cultural Change, 46(3), pp. 581-597.

King, Robert G and Levine, Ross (1993a), “Finance and Growth: Schumpeter Might Be Right.” Quarterly Journal of Economics, 108(3), pp. 717-37.

King, Robert G and Levine, Ross (1993b), “Finance, Entrepreneurship and Growth: Theory and Evidence.” Journal of Monetary Economics, 32(3), pp. 513-42.

Kwan, Andy C., Wu, Yangru and Zhang, Junxi (1998), “An Exogeneity Analysis of Financial Deepening and Economic Growth: Evidence from Hong Kong, South Korea and Taiwan.” Journal of International Trade and Economic Development, 7(3), pp. 339-54.

Levine, Ross (1997), “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature, 35(2), pp. 688-726.

Levine, Ross (1998), “The Legal Environment, Banks, and the Long-Run Economic Growth.” Journal of Money Credit and Banking, 30(3), pp. 596-613.

Levine, Ross and Zervos, Sara (1998), “Stock Markets, Banks and Economic Growth.” American Economic Review, 88(3), pp. 537-558.

Lucas , Robert E (1988), “On the Mechanics of Economic Development.” Journal of Monetary Economics, 22(1), pp. 3-42.

Mathieson, Donald J (1980), “Financial Reform and Stabilization Policy in a Developing Economy.” Journal of Development Economics, 7(3), pp. 359-395.

McKinnon, Ronald I (1973), Money and Capital in Economic Development. Washington, DC: Brookings Institution.

Okedokun, M.O (1998), “Financial Intermediation and Economic Growth in Developing Countries.” Journal of Economic Studies, 25(3), pp. 203-234.

Patrick, Hugh T (1966), “Financial Development and Economic Growth in Underdeveloped Countries.” Economic Development and Cultural Change, 14(2), pp. 174-187.

Porter, Richard C (1966), “The Promotion of the Banking Habit and Economic Development.” Journal of Development Studies, 2(4), pp. 346-366.

Rajan, Raghuram G. and Zingales, Luigi (1998), “Financial Dependence and Growth.” American Economic Review, 88(3), pp. 559-586.

Ram, Rati (1999), “Financial Development and Economic Growth: Additional Evidence.” Journal of Development Studies, 35(4), pp. 164-174.

Robinson, Joan (1952), “The Generalization of the General Theory.” in The Rate of Interest, and Other Essays. London: Macmillan, pp. 67-142.

Roubini, Nouriel and Sala-I-Martin, Xavier (1992), “Financial Repression and Economic Growth.” Journal of Development Economics”, 39(1), pp. 5-30.

Rousseau, Peter and Wachtel, Paul (1998) “Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries.” Journal of Money Credit and Banking, 30(4), pp. 657-678.

Schumpeter, Joseph A. (1912), Theorie der Wirtschaftlichen Entwicklung [The Theory of Economic Development]. Leipzig: Dunker & Humblot, translated by Redvers Opie. Cambridge, MA: Harvard University Press, 1934.

Shaw, Edward S (1973), Financial Deepening in Economic Development. New York: Oxford University Press.

Singh, Ajit and Weisse, Bruce A (1998), “Emerging Stock Markets, Portfolio Capital Flows and Long-Term Economic Growth: Micro and Macroeconomic Perspectives.” World Development, 26(4), pp. 607-22.

Spears, Annie (1992), “The Role of Financial Intermediation in Economic Growth in Sub-Saharan Africa.” Canadian Journal of Development Studies, 13(3), pp. 361-380.

Thornton, John (1996), “Financial Deepening and Economic Growth in Developing Economies.” Applied Economic Letters, 3(4), pp. 243-46.

Wachtel, Paul and Rousseau, Peter (1995), “Financial Intermediation and Economic Growth: A Historical Comparison of the United States, United Kingdom, and Canada”, in Michael D. Bordo and Richard Sylla (Eds.) Anglo-American Financial Systems: Institutions and Markets in the Twentieth Century, Burr Ridge, IL. : Business One Irwin, pp. 329-81.