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Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China

Shahbaz, Muhammad and Bhattacharya, Mita and Kumar, Mantu (2017): Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China.

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Abstract

This paper explores the impact of industrialisation and urbanisation on financial development by incorporating the role of institutional quality for India and China over the period of 1970-2013. We apply the bounds testing approach, which accommodates structural breaks, in order to test the presence of cointegration between the variables. The results show the existence of long-run dynamics between the series. Furthermore, we establish that industrialisation and urbanisation lead to financial development and that the lack of institutional quality and government size reduces financial development. Trade openness enhances Indian financial development but hinders Chinese financial development. The causality analysis depicts the bidirectional causality between urbanisation (industrialisation) and financial development for India. In the case of China, the urbanisation Granger causes financial development, and the feedback effect exists between industrialisation and financial development. Institutional quality is found to be the core factor in enhancing financial development in both countries with a feedback effect.

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