Financial development and economic growth in Brazil: A Non-linear ARDL approach

Moyo, Clement and Khobai, Hlalefang and Kolisi, Nwabisa and Mbeki, Zizipho (2018): Financial development and economic growth in Brazil: A Non-linear ARDL approach.

Abstract

Financial intermediation through the banking system plays an important role in economic development through the allocation of savings, thus improving productivity, and ultimately increasing the rate of economic growth. This paper examines the interrelationships between financial development and economic growth using the Nonlinear Autoregressive Distributed Lag (NARDL) model for Brazil. The time component of the study’s database is 1985 – 2015 inclusive. The study focused on the banking sector and stock market indicators of financial developments. The empirical results suggest that the banking sector measures of financial development have a negative relationship with economic growth while the financial development indicators representing stock market development are positively related to economic growth. The study also established an evidence of a long run and short run asymmetric relationship between financial development and growth. The empirical results open new insights for policy makers for long run and sustainable economic development.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial development, economic growth, Non-linear ARDL, Brazil
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Abida, Z., Sghaier, I.M & Zghidi, N. 2015. Financial development and economic growth: evidence from North African countries. Economic Alternatives, 2: 17-33.

Alfaro, L., Chanda, A., Sebnem, K.O., and Sayek, S. 2004. FDI and economic growth: the role of local financial markets, Journal of International Economics, 64(1): 89-112.

Arcand, J. L., Berkes, E. & Panizza, U. 2015. Too much finance? Journal of Economic Growth, 20: 105-148.

Banco Central Do Brasil, 2017. Financial stability report. Volume 16, n. 2. [Online] Available: https://www.bcb.gov.br/?FINANCSTAB. [Accessed 10 January 2018].

Beck, R., Georgiadis, G. & Straub, R. 2014. The finance and growth nexus revisited. Economic Letters, 124: 382-385.

Beck, T., Demirgüç-Kunt, A. & Levine, R. 2000. A new database on financial development and structure. World Bank Economic Review 14(1): 597-605.

Beck, T., Demirgüç-Kunt, A. & Levine, R. 2009. Financial institutions and markets across countries and over time: Data and analysis. World Bank Policy Research Working Paper 4943. May 2009.

Breusch, T. S. & Pagan, A. R. 1979. A simple test for heteroskedasticity and random coefficient variation. Econometrica. 47(5): 1287–1294.

Breusch, T. S. 1978. Testing for autocorrelation in dynamic linear models. Australian Economic Papers. 17(31): 334–355.

Čihák, M., Demirgüç-Kunt, A., Feyen, E. & Levine, R. 2012. Benchmarking financial development around the world. Policy Research Working Paper 6175, World Bank, Washington, DC, August 2012.

de Carvalho F.J.C. 2008. Financial liberalization in Brazil and Argentina. In: Arestis P., de Paula L.F. (eds) Financial liberalization and economic performance in emerging countries. Palgrave Macmillan, London.

Demetriades, P.O. and Hussein, K.A., 1996. Does financial development cause economic growth? Time series evidence from 16 countries. Journal of development economics, 51, 387–411.

Estrada, G., Park, D. & Ramayandi, A.2010. Financial development and economic growth in developing Asia. Working Paper, Asian Development Bank.

Filho, E.T.T., Macahyba, L. & Zeida, R. 2014. Restructuring Brazil’s national financial system. International Research Initiative on Brazil and Africa (IRIBA) Working Paper: 06.

Friedman, M. and Schwartz, A.J., 1963. A monetary history of the United States. Princeton, NJ: Princeton University Press.

Godfrey, L.G. 1978. Testing against general autoregressive and moving average error models when the regressors include lagged dependent variables. Econometrica, 46(6): 1293-1301.

Goldfajn, L., Hennings, K. & Mori, H. 2003. Brazil’s financial system: resilience to shocks, no currency substitution, but struggling to promote growth. Center for International Development Working Paper No. 170.

Gondo, J.2009. Financial development and economic growth: Evidence from South Africa: 1970-1999. [Online] Available: https://www.ekon.sun.ac.za/miniconf2009/gondo_pape r.pdf. [Accessed 10 January 2018].

Greenwood, J., and Jovanovic, B., 1990. Financial development, growth and the distribution of income, Journal of Political Economy, 98(5): 1076-1107.

Gujarati, D.N. & Porter, D.C. 2009. Basic econometrics. 5th Edition. Singapore: McGraw-Hill.

Hassan, KM., Sanchez, B. and Yu, J. 2011. Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51, 88-104.

Hermes, N., and Lensink, R., 2003. Foreign direct investment, financial development and economic growth, Journal of Development Studies, 40, 142-163.

International Monetary Fund, 2012. Financial system stability assessment. IMF Country Report No. 12/206. [Online] Available: https://www.imf.org/en/Publications/CR/Issue s/2016/12/31/Brazil- Financial-System-Stability-Assessment-26133. [Accessed 23 January 2018].

Jalil, A & Feridun, M. 2011. Impact of financial development on economic growth: empirical evidence from Pakistan. Journal of the Asia Pacific Economy, 16: 71-80.

Khan, S.M. and Senhadji, A.S., 2000. Financial development and economic growth: an overview (IMF Working Paper 00/209). Washington, DC: International Monetary Fund.

Kuznets, S., 1955. Economic growth and income inequality. American economic review, 45: 1–28.

Law, S. H. & Singh, N. 2014. Does too much finance harm economic growth? Journal of Banking and Finance, 41: 36-44.

Levine, R. (1999). Financial development and economics growth: Views and agenda. World Bank Policy Research Working Paper, No 1678.

Levine, R. (1997). Financial development and economic growth: Views and Agenda. Journal of Economic Literature, 35: 688-726.

Levine, R., & Zervos, S. (1998). Stock markets, banks and economic growth. American Economic Review, 88: 537–558.

Lucas, R. 1988. On the Mechanism of Economic Development. Journal of Monetary Economics, 22(1): 3-42.

Madsen, J.B., Islam, M.D.R., Doucouliagosc, H. 2011. Inequality, financial development and economic growth in the OECD, 1870-2011. Discussion paper, Monash Business School.

Nyasha, S. & Odhiambo, M.N. 2015. The impact of bank-based and market-based financial development on economic growth: Time-series evidence from the United Kingdom. Working Paper. University of South Africa.

Nyasha, S. & Odhiambo, N.M. 2017. Bank versus stock market development in Brazil: an ARDL bounds testing approach. South East European Journal of Economic and Business, 12(1): 7-21.

Pesaran, M. H., Shin, Y. & Smith, R. S. 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(1): 289-326.

Ramsey, J. B. 1969. Tests for specification errors in classical linear least squares regression analysis. Journal of the Royal Statistical Society. Series B. 31(2): 350–371.

Robinson, J., 1952. The rate of interest and other essays. London: Macmillan.

Rousseau, P.L. and Vuthipadadorn, D., 2005. Finance, investment, and growth: time series evidence from 10 Asian economies. Journal of macroeconomics, 27: 87–106.

Schumpeter, J. (1911), The theory of economic development, Oxford University Press, Oxford.

Seetanah, B., Ramessur, S.T.& Rojid, S. Financial development and economic growth New evidence from a sample of island economies. Journal of Economic Studies, 36: 124-134.

Shen, C., and Lee, C., 2006. Same financial development yet different economic growth- why? Journal of Money, Credit and Banking, 38(7): 1907-1944.

Shin Y., Yu B., Greenwood-Nimmo M. 2014. Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL Framework. In: Sickles R., Horrace W. (eds) Festschrift in Honor of Peter Schmidt. Springer, New York, NY.

World Bank, 2017. World Development Indicators. [Online], Available: http://data.worldbank.org. [Accessed 14 November 2017].