A model of growth and finance: FIML estimates for India

Rao, B. Bhaskara and Tamazian, Artur (2008): A model of growth and finance: FIML estimates for India.

Abstract

Many empirical works addressed the nature of the relationship between economic growth and financial developments. Although these studies concede that they are interdependent, they have used single equations methods for estimation. In particular in the country specific studies the Granger causality tests are applied to equations estimated with the single equations methods to determine whether financial developments cause growth or vice versa. This paper uses the full information maximum likelihood method to estimate a two equations model of growth and finance for India. We also argue that in virtually all these empirical works the specification of the output equation is unsatisfactory. Our results with the Indian data show that there is no evidence to support the view that finance follows where enterprise goes. Furthermore, financial developments have a small but significant permanent growth effect in India.

• Item Type: MPRA Paper
• Language: English
• Keywords: Steady State Growth Rate, Financial Development, Solow Model, Simultaneous Equation Model and FIML Estimates
• 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 > O11 - Macroeconomic Analyses of Economic Development; 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

References

Amemiya, T., 1977. The maximum likelihood and the nonlinear three-stage least squares estimator in the general nonlinear simultaneous equations model. Econometrica 45, 1955-968.

Ang, J. B. and McKibbin, W. J., 2007. Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics 84, 215–233.

Ang, J., 2008. What are the mechanisms linking financial development and economic growth in Malaysia? Journal of Policy Modelling 25(1), 38-53.

Ang, J., and McKibbin W., 2007. Financial Liberalization, Financial Sector Development and Growth: Evidence from Malaysia. Journal of Development Economics 84(1), 215-233.

Arestis, P. 2005. Financial Liberalisation and the Relationship between Finance and Growth. CEPP Working Paper, No. 05/05, University of Cambridge – Centre for Economic and Public Policy, Cambridge.

Banerjee, A. V., Cole, S., and Duflo, E., 2004. Banking Reform in India. Mimeographed.

Burnside, C. and Dollar, D., 2000. Aid, Policies, and Growth. American Economic Review 90(4), 847–68.

Demirgüc-Kunt, A. and Levine, R., 2008. Finance, Financial Sector Policies, and Long-Run Growth. Policy Research Working Paper No. 4469. World Bank, Washington D.C.

Easterly, W, Levine, R., and Roodman, D., 2004. Aid, Policies, and Growth: Comment. American Economic Review 94, 774–80.

Granger, C. W. J., 1988. Some recent developments in a concept of causality. Journal of Econometrics 39, 199-211.

Granger, C.W.J., (ed.) 1990. Introduction, in Modelling Economic Series: Readings in Econometric Methodology. Oxford: Oxford University Press.

Hausman, J. A., 1975. An instrumental variable approach to full-information estimators for linear and certain nonlinear econometric models. Econometrica 43, 727-738.

Hayashi, F., 2000. Econometrics. Princeton University Press: Princeton.

Hendry, D. F., 2000. Econometrics techniques: General discussion. In Backhouse, R. E. and Salanti, A. (Eds.), Macroeconomics and the Real World. Oxford: Oxford University Press.

Jones, C., 2000. Note on the closed-form solution of the Solow model. Available from Jones’ homepage.

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

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

Luintel, K. B., Khan, M., Arestis, P. and Theodoridis, K., 2008. Financial Structure and Economic Growth. Journal of Development Economics 86(1), 181–200.

Pedroni, P., 2001. Purchasing power parity tests in cointegrated panels. The Review of Economics and Statistics 83 (4), 727–731.

Pedroni, P., 1999. Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61, 653-70.

Phillips, P. C. B., 1982. On the consistency of non-linear FIML. Econometrica 50, 1307-24.

Rao, B. B., 2006. Investment Ratio and Growth. ICFAI Journal of Applied Economics 3(4), 68-72.

------------- 2007. Estimating short and long run relationships: A guide to applied economists. Applied Economics 39(13), 1613-1625.

Rao, B. B., Singh, R. and Kumar, S., 2008. Do we need time series econometrics? MRPA Paper No. 6627.

Rioja, F. and Valev, N., 2004. Does one size fit all?: a reexamination of the finance and growth relationship. Journal of Development Economics 74 (2), 429– 447.

Robinson, J., 1952. The Rate of Interest, and Other Essays. London: Macmillan.

Sato, R., 1963. Fiscal Policy in a Neo-Classical Growth Model: An Analysis of Time Required for Equilibrium Adjustment. Review of Economic Studies 30(1), 16-23.

Solow, R., 1956. A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70(1), 65-94.

Stock, J., and Watson, M., 2003. Introduction to Econometrics. New York: Addison-Wesley.