Is globalization detrimental to financial development? Further evidence from a very large emerging economy with significant orientation towards policies

Shahbaz, Muhammad and Mallick, Hrushikesh and Kumar, Mantu and Hammoudeh, Shawkat (2017): Is globalization detrimental to financial development? Further evidence from a very large emerging economy with significant orientation towards policies.

Abstract

This study attempts to explore the relationship between globalization and financial development by endogenising economic growth, population density, inflation and institutional quality for India during the period from 1971-2013. Using the more conclusive Bayer-Hanck (2013) combined cointegration method, the study provides evidence of cointegration among these variables. The long run and short run estimates from the ARDL model and causality tests respectively suggest that globalization in its all forms (political, social and economic) and its overall measure as well as inflation are detrimental to financial development, while economic growth and population density both promote financial development. Further, the results also point out that institutional quality is not conducive to financial development in India, and there exists a feedback effect between financial development and inflation. Moreover, financial development is influenced by economic growth, institutional quality and population density.

• Item Type: MPRA Paper
• Language: English
• Keywords: Globalization, financial development, institutional quality, inflation, India
• Subjects: C - Mathematical and Quantitative Methods > C0 - General

References

Abbey, E.N. (2012). Inflation and financial development: evidence. American Journal of Economics and Business Administration, 4(4), pp. 227-236.

Afzal, M. (2007). ‘The impact of globalization on economic growth of Pakistan’, The Pakistan Development Review, 12-14, pp. 723-734.

Akosah, N.K. (2013). Dynamics of inflation and financial development: empirical evidence from Ghana. Journal of Economics and Sustainable Development, 4(15), pp. 20-37.

Ang, J.B. (2008a). ‘Survey of Recent Developments in the Literature of Finance and Growth’, Journal of Economic Surveys, 22, pp. 536-576.

Ang, J.B. (2008b). ‘What are the mechanisms linking financial development and economic growth in Malaysia’, Economic Modelling, 25, pp. 38-53.

Baltagi, B.H., Demetriades, P. and Law, S.H. (2009). ‘Financial development and openness: panel data evidence’, Journal of Development Economics, 89(2), pp. 285-296.

Banerjee, A., Dolado, J., and Mestre, R. (1998). ‘Error correction mechanism tests for cointegration: a single equation framework’, Journal of Times Series Analysis, 19(3), pp. 267-283.

Bayer, C. and Hanck, C. (2013). ‘Combining non-cointegration tests’, Journal of Time Series Analysis, 34(1), pp. 83-95.

Beck, T., Levin, R. and Loayza, N. (2000). ‘Finance and sources of growth’, Journal of Financial Economics, 58, pp. 261-300.

Bittencourt, M. (2007). Inflation and financial development: Evidence from Brazil. Proceedings of the German Development Economics Conference, Gottigen, 2007.

Bittencourt, M. (2011). ‘Inflation and financial development: Evidence from Brazil’, Economic Modelling, 28, pp. 91-99.

Blundell, R.W. and Bond, S.R. (1998). ‘Initial conditions and moment restrictions in dynamic panel data models’, Journal of Econometrics, 87, pp. 115-143.

Bodenhorn, H. and Cuberes, D. (2010). ‘Financial Development and City Growth: Evidence from Northeastern American Cities, 1790-1870. NBER, Working Paper 15997. www.nber.org

Brown, R., Durbin, L. J. and Evans, J. M. (1975). ‘Techniques for Testing the Constancy of Regression Relationships over Time’, Journal of the Royal Statistical Society, 37, pp. 149-192.

Boswijk, H.P. (1994). ‘Testing for an unstable root in conditional and unconditional error correction models’, Journal of Econometrics, 63(1), pp.37-60.

Boyd, J.H., Levin, R., and Smith, B.D. (2001). The impact of inflation on financial sector performance. Journal of Monetary Policy, 47, 221-248.

Boyd, J. H., Levine, R. and Smith, B. D. (2001). ‘The impact of inflation on financial sector performance’, Journal of Monetary Economics, 47(2), pp.221-248.

Chakraborty, I. (2010). ‘Does financial development cause economic growth? The case of India’, South Asia Economic Journal, 11, pp.287-308.

Dreher, A. (2006). ‘Does globalization affect growth? Evidence from a new index of globalization’, Applied Economics, 38, pp.1091-1110.

Engle, R.F. and Granger, C.W.J. (1987). ‘Cointegration and error correction: representation, estimation and testing’, Econometrica, 55(2), pp. 251-276.

Falahaty, M. and Law, S.H. (2012). ‘The effect of globalization on financial development in the MENA region’, Transition Studies Review, 19, pp. 205-223.

Feridun, M. (2006). ‘Long-run relationship between economic growth and stock returns: an empirical investigation on Canada and the United States’, MPRA paper 737, University Library of Munich, Germany.

Fisher, R. (1932). ‘Statistical methods for research workers’, Oliver and Boyd, London.

Fung, M.K. (2009). ‘Financial development and economic growth: convergence or divergence’, Journal of International Money and Finance, 28(1), pp. 56-67.

García, E.D.T. (2011). ‘Financial globalization and financial development in transition countries’, http://www.izt.uam.mx/economiatyp/numeros/numeros/36/articulos_PDF/36_6_Articulo.pdf

Gelisme, E.F., EtkiLeri, U., and Bulgular, T.I. (2012). Relationship between inflation and financial development: evidence from Turkey. International Journal of Alanya Faculty of Business, 4(2), pp. 81-87.

Grima, S. and Shortland, A. (2008). ‘The political economy of financial development’, Oxford Economic Papers, 60(4), pp. 567-596.

Gu, X. and Dong, B. (2011). ‘A theory of financial liberalization: why are developing countries so reluctant?’, The World Economy, 34(7), pp. 1106-1123.

Huang, Y. (2010). ‘Political institutions and financial development: an empirical study’, World Development, 38(12), pp.1667-77.

Huang, H.C., Lin, S.C., Kim, D.H., Yeh, C.C. (2010). Inflation and the finance-growth nexus. Economic Modelling, 27, 229-236.

Hsueh, S-J., Hu, Y-H. and Tu, C-H. (2013). ‘Economic growth and financial development in Asian Countries. A bootstrap panel Granger causality analysis’, Economic Modelling, 32, pp.294-301.

Johansen, S. (1991). ‘Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models’, Econometrica, 59(6), pp.1551-1580.

Kandil, M., Shahbaz, M. and Nasreen, S. (2015). ‘The interaction between globalization and financial development: new evidence from panel cointegration and causality analysis’, Empirical Economics, DOI 10.1007/s00181-015-0922-2.

Kendall, J. (2012). Local financial development and growth. Journal of Banking & Finance, 36(5), 1548-1562.

Khan, M.S., Senhadji, A.S., and Smith, B.D. (2006). Inflation and financial depth. Macroeconomic Dynamics, 10(2), pp. 165-182.

Kim, D., Lin, S. and Suen, Y. (2010). ‘Dynamic effects of trade openness on financial development’, Economic Modelling, 27(1), pp.254-261.

Kumar, A. (2008). ‘Banking the poor. Measuring banking access in 54 countries’, World Bank, Washington, D. C.

Kim, D-H. and Lin, S-C. (2010). ‘Dynamic relationship between inflation and financial development’, Macroeconomic Dynamics, 14, pp. 343-364.

Kroos, H.E. (1967). Financial Institutions: In the growth of Seaport Cities, 1790-1825, PP. 104-138. Edited by D.T.Gilchrist. Charlottesville: University Press of Virginia.

Law, S.H. (2009). ‘Trade openness, capital flows, and financial development in developing countries’, International Economic Journal, 23(3), pp. 409-426.

Law, S.H., Tan, H.B. and Azman-Saini, W.N.W. (2015). ‘Globalization, institutional reforms and financial development in East Asian Economies’, The World Economy, 38(2), pp. 379-398.

Law, S.H. and Singh, N. (2014). ‘Does too much finance harm economic growth?’, Journal of Banking and Finance, 41, pp. 36-44.

Levin, R., Loayza, N. and Beck, T. (2000). ‘Financial intermediation and growth: causality and causes’, Journal of Monetary Economics, 46, pp. 31-77.

Leow, Y. G. (2004). ‘A reexamination of the exports in Malaysia’s economic growth: after Asian financial crisis, 1970-2000’, International Journal of Management Sciences, 11, pp. 79-204.

Liu, W-C. and Hsu, C-M. (2006). ‘The role of financial development in economic growth: The experiences of Taiwan, Korea, and Japan’, Journal of Asian Economics, 17, pp. 667-690.

Lütkepohl, H. (2006). ‘Structural vector autoregressive analysis for cointegrated variables’, AStA Advances in Statistical Analysis, 90, pp.75-88.

Mishkin, Frederic S., 2006. The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. Princeton University Press, Princeton, N.J.

Mishkin, F.S. (2009). ‘Globalization and financial development’, Journal of Development Economics, 89(2), pp. 164-169.

Minsky, H.P. (1975) “John Maynard Keynes”, New York, Colombia University Press

Narayan, P.K. (2005). ‘The saving-investment nexus for China. Evidence from cointegration tests”, Applied Economics, 37(17), pp. 1979-1990.

Naceur, S.B., Cherif, M., and Kandil, M. (2014). What drives the development of the MENA financial sector. Borsa Istanbul Review, 14-4, pp. 212-223.

Obstfeld, M. (1994). ‘Risk-taking, global diversification, and growth’, American Economic Review, 84, pp. 1310-1329.

Pesaran, M.H., Shin, Y. and Smith, R.J., (2001). ‘Bounds testing approaches to the analysis of level relationships’, Journal of Applied Econometrics, 16, pp.289-326.

Phillips, P.C.B. and Ouliaris, S. (1990). ‘Asymmetric properties of residual based tests for cointegration’, Econometrica, 58, pp. 165-193.

Poterba, J. (2004). The impact of population aging on financial markets. National Bureau of Economic Research (NBER) Working Paper 10851.

Rajan, R.G. and Zingales, L. (1998). ‘Financial dependence and growth’, The American Economic Review, 88, pp. 559-586.

Rajan, R.G. and Zingales, L. (2003). ‘The great reversals: the politics of financial development in the twentieth century’, Journal of Financial Economics, 69(1), pp. 5-50.

Rao, B.B. and Vadlammanti, K.C. (2011a). ‘Globalization and growth in the low income African countries with the extreme bounds analysis’, Economic Modelling, 28, pp.795-805.

Rao, B.B., Tamazian, A. and Vadlammanti, K.C. (2011b). ‘Growth effects of a comprehensive measure of globalization with country-specific time series data’, Applied Economics, 43, pp. 551-568.

Reserve Bank of India, RBI (2006). ‘Report on Currency and Finance’, 2006.

Rosseau, P.L., and Wacthel, P. (2002). Inflation thresholds and the finance-growth nexus. Journal of International Money and Finance. 21, 777-793.

Rosseau, P.L., and Yilmazkuday, H. (2009). Inflation, financial development and growth: a trilateral analysis. Economic Systems, 33, 310-324.

Rodrik, D. (2007). Saving globalization from its cheerleaders. Rodrikhttp://www.nottingham.ac.uk/gep/news-events/public-lectures/world-econ-lect/index.aspx.

Seigel, J. (1998). Stocks for the long run, Second Edition (New York: McGraw Hill).

Schieber, S. and Shoven, J. (1997). The consequences of population aging on private pension fund saving and asset markets in S. Schieber and J. Shoven, eds., Public Toward Pensions (Cambridge: MIT Press), pp. 219-245.

Sun, P., Sen, S. and Tong, J. (2011). ‘Size effects on the transmission mechanism from finance to development. A study of large emerging economies’, The World Economy, 34(5), pp. 778-791.

Shahbaz, M., Qureshi, M. N. and Naveed, A. (2007). ‘Remittances and Financial Sector’s Performance: Under Two Alternative Approaches for Pakistan’, International Research Journal of Finance and Economics, 12, pp. 133-146.

Shahbaz, M., Saleheen, K. and Tahir, M. I. (2013). ‘The dynamic link between energy consumption, economic growth, financial development and trade in China: fresh evidence from multivariate framework analysis,’ Energy Economics, 40, pp. 8-21.

Stiglitz, J.E. (2003). ‘Globalization and growth in emerging markets and the New economy’, Journal of Policy Modeling, 12(1), pp. 3-26.

Stiglitz, J.E. (2004). ‘Globalization and growth in emerging markets’, Journal of Policy Modeling, 26(4), pp.466-484.

Svaleryd, H. and VIachos, J. (2002). ‘Market for risk and openness to trade: how are they related?’, Journal of International Economics, 57, pp. 369-395.

Tinoco-Germino, M.A., Venegas-Martinez, F., and Toress-Preceado, V.H. (2014). Growth, bank credit, and inflation in Mexico: evidence from an ARDL-bounds testing approach. Latin American Economic Review, 23 (8). DOI 10. 1007/s40503-014-0008-0.

Wahid, A. N.M., Shahbaz, M. and Azim, P. (2011). ‘Inflation and Financial Sector Correlation: The Case of Bangladesh’, International Journal of Economics and Financial Issues, 1(4), pp. 145-152.

Zivot, E. and Andrews, D. (1992). ‘Further evidence of great crash, the oil price shock and unit root hypothesis’, Journal of Business and Economic Statistics, 10, pp. 251-270.