Does finance matter for growth? what the data show

Sarkar, Prabirjit (2011): Does finance matter for growth? what the data show.

Abstract

This paper analyses the relationship between financial development (as measured by expansion of domestic credit to private sector relative to GDP) and growth for a sample of 65 less developed countries over a long period, 1980-2006. Using causality tests at various lag-orders we find a strong evidence of mutual causation. We have used alternative dynamic panel data models to estimate the relationships between the two. While the mean group model suggests no relationship in either direction, the pooled mean group model and dynamic fixed effect model show two opposite long-term relationships: finance-to-growth relationship is negative whereas growth-to-finance link is positive.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial development, growth, dynamic panel data analysis
• Subjects: 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; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O50 - General; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Aghion, Philippe, Peter Howitt and David Mayer-Foulkes (2005). “The effect of financial development on convergence: theory and evidence,” Quarterly Journal of Economics, 120(1), 173-222.

Arestis, Philip and Panicos O. Demetriades (1997). “Financial development and economic growth: assessing the evidence,” The Economic Journal, 107(May), 783–799.

Beck, Thorsten, Ross Levine and Norman Loayza (2000). “Finance and the source of growth,” Journal of Financial Economics, 58, 261-300.

Bekaert, Geert and Christian Lundblad (2005).”Does financial liberalization spur growth,” Journal of Financial Economics, 77, 3-55.

Bell, C., and P.L., Rousseau (2001). “Post-independence India: a case of finance-led industrialization?,” Journal of Development Economics, 65,153–175.

Bencivenga, V.R., and B.D., Smith (1991). “Financial intermediation and endogenous growth,” Review of Economic Studies, 58, 195–209.

Blackburne III, Edward F. and Mark W. Frank (2007). “Estimation of non-stationary heterogeneous panels,” The Stata Journal, 7(2), 197-208.

Buffie, Edward F. (1984). “Financial repression, the new structuralists, and stabilization policy in semi-industrialized economies,” Journal of Development Economics, 14, 305–322.

Cameron, R.E., Crisp, O., Patrick, H.T., Tilly, R. (1967). Banking in the Early Stages of Industrialization, Oxford University Press, New York.

Demetriades, Panicos O. and K.A., Hussein (1996) “Does financial development cause economic growth?: Time-series evidence from 16 countries,” Journal of Development Economics, 51: 387–411.

Demetriades, Panicos O. and Kul B. Luintel (1996). “Financial Development, Economic Growth and Banking Sector Controls. Evidence from India,” The Economic Journal, 106 (435), 359-374.

Dornbusch, Rudiger and Aejandro Reynoso (1989) “Financial factors in economic development,” American Economic Review, 79 (2), 204-209.

Fry, J. Maxwell (1997). “In favour of financial liberalization,” The Economic Journal, 107(May), 754-770.

Fry, J. Maxwell(1980). “Saving, investment, growth and the cost of financial repression,” World Development, 8 (April), 317-27.

Fry, J. Maxwell(1978). “Money and capital or financial deepening in economic development?,” Journal of Money, Credit and Banking, 10(4), 464-475.

Gerschenkron, A.(1962). Economic Backwardness in Historical Perspective: A Book of Essays, Harvard University Press, Cambridge, MA.

Goldsmith, R.W. (1969) Financial Structure and Development, Yale University Press, New Haven, CT.

Greenwood, J., and B., Jovanovic (1990). “Financial development, growth, and the distribution of income,” Journal of Political Economy, 98, 1076–1107.

Gregorio Jose de and Pablo E. Guidoti (1995). “Financial development and economic growth,” World Development, 23(3), 433-446.

Gurley, J.G., and E.S., Shaw (1955). ‘Financial aspects of economic development,’ American Economic Review, 45, 515–538.

Hilferding, Rudolph (1910) Finance Capital: A Study of the Latest Phase of Capitalist Development, Routledge, London.

Jung, W.S., (1986) ‘Financial development and economic growth: international evidence,’ Economic Development and Cultural Change, 34, 333–346.

King, R.G., and R., Levine (1993). “Finance and growth: Schumpeter must be right,” Quarterly Journal of Economics, 108, 717–737.

Levine, Ross (2003). “Stock markets liquidity and economic growth: theory and evidence,” in Luigi Paganetto and Edmond S. Phelps (eds), Finance, Research, Education and Growth, Palgrave Macmillan, New York.

Levine, Ross (2001). “International financial liberalisation and economic growth,” Review of International Economics, 9 (4), 688-702.

Levine, Ross(1997). “Financial development and economic growth: views and agenda,” Journal of Economic Literature, 35, 688:726.

Levine, Ross, Norman Loayza and Thorsten Beck (2000). “Financial intermediation and growth: causality and causes,” Journal of Monetary Economics, 46, 31-77.

Levine, Ross and Sara Zervos (1998). “Stock markets, banks, and economic growth,” American Economic Review, 88 (3), 537-558.

Lucas, Robert E., JR. (1988). “On the mechanics of economic development,” Journal of Monetary Economics, 22 (1), 3-42.

Meier, Gerald M. and Dudley Seers (1984). Pioneers in Development, Oxford University Press, New York.

McKinnon, Ronald I. (1973). Money and Capital in Economic Development, Brookings Institution, Washington, DC.

Patrick, H. (1966). “Financial development and economic growth in underdeveloped countries,” Economic Development and Cultural Change, 14, 174-189.

Pesaran, M. H., Y. Shin, and R. P. Smith (1999). “Pooled mean group estimation of dynamic heterogeneous panels,” Journal of the American Statistical Association 94, 621-634.

Pesaran, M. H., and R. P. Smith (1995). “Estimating long-run relationships from dynamic heterogeneous panels,” Journal of Econometrics 68, 79-113.

Rajan, R.G., and L., Zingales (1998). “Financial dependence and growth,” American Economic Review, 88, 559-586.

Quinn, Dennis (1997). “The correlates of change in international financial regulation,” American Political Science Review, 91(3), 531–51.

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

Rousseau, P.L., and P., Wachtel (1998). “Financial intermediation and economic performance: historical evidence from five industrialized countries.” Journal of Money, Credit, and Banking, 30, 675–678.

Rousseau, Peter L. and Dadanee Vuthipadadorn (2005). “Finance, investment, and growth: time series evidence from 10 Asian economies,” Journal of Macroeconomics, 27, 87-106/

Schaberg, Marc (1999). Globalisation and the Erosion of National Financial Systems, Edward Elgar, Aldershot.

Shan, Jordan Z, Alan G. Morris, and Fiona Sun (2001). “Financial development and economic growth: an egg-and-chicken problem?,” Review of International Economics, 9(3), 443-454.

Schumpeter, J.A.(1911). The Theory of Economic Development, Harvard University Press, Cambridge, MA.

Shaw, E.S. (1973). Financial Deepening in Economic Development, Oxford University Press, New York.

Stern, Nicholas (1989). “The economics of development: a survey,” Economic Journal, 99 (397): 597-685.

Toda, H.Y and Yamamoto, T. (1995). “Statistical Inference in Vector Autoregressions with Possibly integrated Processes,” Journal of Econometrics, 66, 225-250.

Wijnbergen, V.S.(1983). “Interest rate management in LDCs,” Journal of Monetary Economics, 12, 433–452.

World Bank (1993) The East Asian Miracle, Oxford University Press, New York.