Financial development and economic growth in Poland in transition: causality analysis

Gurgul, Henryk and Łukasz, Lach (2011): Financial development and economic growth in Poland in transition: causality analysis.

Abstract

The economic literature suggests that the efficient allocation of resources by the financial system speeds up economic development and reduces poverty. However, there are economists who find financial development to be the result of economic growth. This study examines causal relationship between economic growth and financial development in Poland on the basis of quarterly data for the period Q1 2000 – Q4 2009. The empirical research was performed in two variants: bank– and stock market–oriented approaches. The results suggest causality running from the development of the stock market to economic growth and from economic growth to the development of the banking sector. This implies that the direction of causality strongly depends on which particular area of the financial sector is considered. Empirical results were found to be robust both to the type of common variable applied and the specification of testing procedure, which clearly validates major conclusions of this paper.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial development, economic growth, transition economies, Granger causality
• 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; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

[1] Abu–Bader S, Abu–Qarn AS (2008): Financial Development and Economic Growth: The Egyptian Experience. Journal of Policy Modeling, 30: 887–898.

[2] Agiakoglu C, Newbold P (1992): Empirical Evidence on Dickey–Fuller Type Tests. Journal of Time Series Analysis, 13: 471–483.

[3] Al–Awad M, Harb N (2005): Financial development and economic growth in the Middle East. Applied Financial Economics, 15: 1041–1051.

[4] Andrews DWK, Buchinsky M (2000): A Three–Step Method for Choosing the Number of Bootstrap Repetitions. Econometrica, 68, 23–52.

[5] Baek E, Brock W (1992): A general test for Granger causality: Bivariate model. Technical Report, Iowa State University and University of Wisconsin, Madison.

[6] Bagehot W (1873): Lombard Street. Reprinted (1962): Homewood, IL: Irwin, R.D.

[7] Beck T, Levine R (2004): Stock Markets, Banks and Growth: Panel Evidence. Journal of Banking and Finance, 28: 423–442.

[8] Brock W (1991): Causality, chaos, explanation and prediction in economics and finance. In: Casti J, Karlqvist A (eds.): Beyond Belief: Randomness, Prediction and Explanation in Science. CRC Press, Boca Raton, Fla., 230–279.

[9] Deidda L, Fattouh B (2002): Non–linearity between finance and growth. Economics Letters, 74: 339–345.

[10] Demetriades PO, Hussein AK (1996): Does financial development cause economic growth? Time series evidence from 16 countries. Journal of Development Economics, 51: 387– 411.

[11] Diks CGH, DeGoede J (2001): A general nonparametric bootstrap test for Granger causality. In: Broer HW, Krauskopf W, Vegter G (eds.): Global analysis of dynamical systems. Bristol, Institute of Physics Publishing, 391–403.

[12] Diks CGH, Panchenko V (2006): A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics and Control, 30: 1647–1669.

[13] Dritsakis N, Adamopoulos A (2004): Financial Development and Economic Growth in Greece: An Empirical Investigation with Granger Causality Analysis. International Economic Journal, 18: 547–559.

[14] Dritsaki C, Dritsaki–Bargiota M (2006): The Causal Relationship between Stock, Credit Market and Economic Development: An Empirical Evidence for Greece. Economic Change and Restructuring, 38: 113–127.

[15] Evans A, Green C, Murinde V (2002): Human capital and financial development in economic growth: new evidence using translog production function. International Journal of Finance and Economics, 7: 123–140.

[16] Fase MMG, Abma RCN (2003): Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14: 11–21.

[17] Granger CWJ (1969): Investigating causal relations by econometric models and cross spectral methods. Econometrica, 37: 424–438.

[18] Granger CWJ, Newbold P (1974): Spurious regression in econometrics. Journal of Econometrics, 2: 111–120.

[19] Granger CWJ (1988): Some recent developments in the concept of causality. Journal of Econometrics, 39: 199–211.

[20] Granger CWJ, Huang B, Yang C (2000): A bivariate causality between stock prices and exchange rates: evidence from recent Asian Flu. The Quarterly Review of Economics and Finance, 40: 337–354.

[21] Gurgul H, Lach Ł (2010): The causal link between Polish stock market and key macroeconomic aggregates. Betriebswirtschaftliche Forschung und Praxis, 4: 367–383.

[22] Gurgul H, Lach Ł (2011): The role of coal consumption in the economic growth of the Polish economy in transition. Energy Policy, 39: 2088-2099.

[23] Hacker RS, Hatemi–J A (2006): Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application. Applied Economics, 38: 1489–1500.

[24] Hicks J (1969): A theory of economic history. Clarendon Press, Oxford.

[25] Horowitz JL (1995): Bootstrap methods in econometrics: Theory and numerical performance. In: Kreps DM, Wallis KF (eds.): Advances in Economics and Econometrics: Theory and Applications. Cambridge, Cambridge University Press, 188–232.

[26] Johansen S (1995): Likelihood–based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press, Oxford.

[27] Kemal AR, Qayyum A, Hanif MN (2007): Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries. The Lahore Journal of Economics, 12: 1–34.

[28] Liu X, Song H, Romilly P (1997): An empirical investigation of the causality relationship between openness and economic growth in China. Applied Economics, 60: 381–405.

[29] Lopez–de–Silanes F, Glaeser E, La Porta V, Shleifer A (2004): Do Institutions Cause Growth? Journal of Economic Growth, 9: 271–303.

[30] Lucas RE (1988): On the Mechanics of Economic Development. Journal of Monetary Economics, 22: 3–42.

[31] Luintel KB, Khan M (1999): A quantitative reassessment of the finance–growth nexus: Evidence from a multivariate VAR. Journal of Development Economics, 60: 381–405.

[32] Lütkepohl H (1993): Introduction to Multiple Time Series Analysis, second ed., Springer–Verlag, New York.

[33] McKinnon RI (1973): Money and capital in economic development. Brookings Institution, Washington.

[34] Newey WK, West KD (1987): A Simple Positive Semidefinite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica, 55: 703–708.

[35] Phillips PCB (1986): Understanding the spurious regression in econometrics. Journal of Econometrics, 33: 311–340.

[36] Rajan RG, Zingales L (1998): Financial dependence and growth. American Economic Review, 88: 559–586.

[37] Robinson J (1952): The Generalization of General Theory and other essays. Macmillan, London.

[38] Schumpeter JA (1934). Theorie der Wirtschaftlichen Entwicklung [The theory of economic development]. Leipzig: Dunker & Humblot, (1912); translated by Redvers Opie. Cambridge, MA: Harvard U. Press.

[39] Shan J, Morris A, Sun F (2001): Financial development and economic growth: an egg–and–chicken problem. Review of international Economics, 9: 443–454.

[40] Shan J, Morris A (2002): Does financial development lead economic growth? International Review of Applied Economics, 16: 153–168.

[41] Shan J (2005): Does financial development ‘lead’ economic growth? A vector autoregression appraisal. Applied Economics, 37: 1353–1367.

[42] Shan J, Jianhong Q (2006): Does Financial Development ‘lead’ Economic Growth? The case of China. Annals of Economics and Finance, 1: 231–250.

[43] Shaw ES (1973): Financial Deepening in Economic Development, Oxford University Press, Oxford.

[44] Sinha D, Macri J (2001): Financial development and economic growth: the case of eight Asian countries. Economia Internazionale, 54: 219–234.

[45] Tang D (2006): The effect of financial development on economic growth: evidence from the APEC Countries, 1981–2000. Applied Economics, 38: 1889–1904.

[46] Thangavelu SM, Ang JB (2004): Financial Development and Economic Growth in Australia: An Empirical Analysis. Empirical Economics, 29: 247–260.

[47] Toda HY, Yamamoto T (1995): Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66: 225–250.

[48] Zang H, Kim YC (2007): Does financial development precede growth? Robinson and Lucas might be right. Applied Economics Letters, 14: 15–19.