Evidence of Korea’s Finance-Growth Nexus: VARX Analysis with Financial Crisis and Openness

Fukuda, Takashi (2015): Evidence of Korea’s Finance-Growth Nexus: VARX Analysis with Financial Crisis and Openness.

Abstract

Korea’s finance-growth nexus is empirically investigated by taking the elements of financial crisis and openness―trade and financial―by employing the newly developed approach of vector error correction models with weakly exogenous I(1) variables (VARX). Considering financial development as a more complex phenomenon, we matter two aspects of financial deepening that are measured by its size (private credit to GDP) and efficiency (private credit to total domestic deposits). The main findings are: (1) financial efficiency contributes to accelerating economic growth; (2) the causality between economic growth and financial size is bilateral and negative; and (3) financial crisis is negative to both economic growth and financial development, whereas the growth-promoting effects of trade and financial openness are confirmed

• Item Type: MPRA Paper
• Language: English
• Keywords: Finance-growth nexus, financial crisis, openness, cointegration, VARX, Korea.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East

References

Ang, J. B. and McKibbin, W. J. 2007. Financial liberalisation, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, 84:1, 215-233. Baltagi, B. H., Demetriades, P. O. and Law, S. H. 2008. Financial development and openness: Evidence from panel data. Journal of Development Economics, 89:2, 285-296. Beck, T., Demirgüç-Kunt, A. and Levine, R. 2009. Financial institutions and markets across countries and over time: data and analysis. World Bank Policy Research Working Paper, No. 4943. Charemza, W. W. and Deadman, D. F. 1997. New Directions in Econometric Practice, 2nd ed. Edward Elgar, Cheltenham. Chiou-Wei, S. Z., Zhu, Z. and Wu, W. (2010) Financial development and economic growth in South Korea: An application of smooth transition error correction analysis, Applied Economics, 42:16, 2041-2052. Demetriades, P. O. and Hussein, K. A. 1996. Does financial development cause economic growth?: Time-series evidence from 16 countries. Journal of Development Economics, 51:2, 87-411. Elliott, G., Rothenberg, T. J. and Stock, J. H. 1996. Efficient test for an autoregressive unit root. Econometrica, 64:4, 813-836. Engle, R. F. and Granger, C. W. J. 1987. Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55:2, 251-276. Fukuda, T. (2014). Linkage between financial development, financial crisis and globalization in India: VARX and ARDL co-integration assessments. Journal of Applied Economics and Business Research, 3:4, 232-248. Fukuda, T. and Dahalan, J. (2012). Finance-growth-crisis nexus in Asian Emerging economies: evidence from VECM and ARDL assessment. International Journal of Economic Sciences and Applied Research, 5:2, 69-100. Fukuda, T. and Dahalan, J., (2011). Finance-growth-crisis nexus in emerging economies: evidence from India, Indonesia and Mexico. International Business and Economics Research Journal, 10:12, 59-78. Gries, T., Kraft, M. and Meierrieks, D. (2009). Linkages between financial deepening, trade Openness and economic development: Causality evidence from Sub-Saharan Africa. World Development, 37:12, 1849-1860. Herwartz, H. and Walle, Y. M. (2014). Openness and the finance-growth nexus. Journal of Banking and Finance, 48, 235-247. Johansen, S. 1988. Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12:2-3, 231-254. Johansen, S., Mosconi, R. and Nielsen, B. (2000). Cointegration analysis in the presence of structural breaks in the deterministic trend. Econometrics Journal, 3:2, 216–249. Kassimatis, K. and Spyrou, S. I. (2001). Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis. Applied Economics, 33:8, 1057-1064. King, R. G. and Levine, R. 1993. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics, 108:3, 717-737. Kose, M. A., Prasad, E. S. and Terrones, M. E. 2006. How do trade and financial integration affect the relationship between growth and volatility? Journal of International Economics, 69:1, 176– 202. Lane, P. R. and Milesi-Ferretti, G. M. 2007. ‘The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004. Journal of International Economics, 73:2, 223-250. Law, S. H. 2008. Does a country’s openness to trade and capital accounts lead to financial development?: Evidence from Malaysia. Asian Economic Journal, 22:2, 161-177. Lee, J. and Strazicich, M. C. 2003. Minimum LM unit root test with two structural breaks. Review of Economics and Statistics, 85:4, 1082-1089. Lee, J. and Strazicich, M. C. 2004. Minimum LM unit root test with one structural break. Appalachian State University Working Paper. Levine, R. and Zervos, S. (1998) Stock markets, banks and economic growth, American Economic Review, 88(3), 537-558. Luintel, K. B. and Khan, M. (1999) A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR, Journal of Development Economics, 60(2), 381-405. McKinnon, R. (1973) Money and Capital in Economic Development, Brookings Institution, Washington DC. Pesaran, M. H. and Pesaran, B. 2009. Time Series Econometrics Using Microfit 5.0. Oxford University Press, Oxford. Pesaran, M. H., Shin, Y. and Smith, R. J. 2000. Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics, 97:2, 293-343. Phillips, P. C. B. and Perron, P. (1988) Testing for unit root in time series regression. Biometrika, 75:2, 335-346. Shahbaz, M. (2012) Does trade openness affect long run growth?: Cointegration, causality and forecast error variance decomposition tests for Pakistan. Economic Modelling, 29:6, 2325–2339 Shaw, E. (1973) Financial Deepening in Economic Development, Oxford University Press, London. Yanikkaya, H. (2003). Trade openness and economic growth: A cross-country empirical investigation. Journal of Development Economics, 72:1, 57-89. Yang, Y. Y. and Yi, M. H. (2008) Does financial development cause economic growth?: Implication for policy in Korea. Journal of Policy Modeling, 30:5, 827-840. Wachtel, P. (2011). The Evolution of the Finance Growth Nexus. Comparative Economic Studies, 53:3, 475–488.