Empirical Reassessment of Bank-based Financial Development and Economic Growth in Hong Kong

Ho, Sin-Yu and Njindan Iyke, Bernard (2017): Empirical Reassessment of Bank-based Financial Development and Economic Growth in Hong Kong. Forthcoming in: Journal of Applied Economic Sciences , Vol. 12, (2017)

Abstract

This paper reassesses the nexus between bank-based financial development and economic growth in Hong Kong during the period 1990 – 2014. That is, it tests whether Hong Kong follows a supply-leading or a demand-following hypothesis. Empirically, economists have generally disagreed on the nexus between bank-based financial development and economic growth. Hong Kong is a typical economy which has experienced both bank-based financial expansion and economic expansion in the last three decades. It therefore serves as a quintessence for testing this overarching debate. Using the Toda-Yamamoto test for causality and two indicators of bank-based financial development – in order to report robust results – the paper finds Hong Kong to follow the supply-leading hypothesis. This implies that the banking sector is vital in driving economic growth in Hong Kong during the study period. Policymakers in this economy will only enhance economic growth further by targeting and ensuring efficient performance of bank-based financial institutions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank-based Financial Development; Economic Growth; Causality; Hong Kong
• 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; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Abu-Bader, S. and Abu-Qarn, A.S. (2008). “Financial Development and Economic Growth: the Egyptian Experience”, Journal of Policy Modeling, 30: 887–898.

Agbetsiafa, D.K. (2003). “The Finance Growth Nexus: Evidence from Sub-Saharan Africa”, International Advances in Economic Research, 9 (2).

Ahmed, S. and Ansari, M. (1998). “Financial Sector Development and Economic Growth: the South Asian Experience”, Journal of Asian Economics 9 (3): 503–517.

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.

Bangake, C. and Eggoh, J.C. (2011). “Further Evidence on Finance-growth Causality: A Panel Data Analysis”, Economic Systems, 35: 176–188.

Bittencourt, M. (2012). “Financial Development and Economic Growth in Latin America: Is Schumpeter Right”, Journal of Policy Modelling, 34: 341-355.

Calderón, C. and Lin, L. (2003). “The Direction of Causality between Financial Development and Economic Growth”, Journal of Development Economics, 72: 321–334.

Caner, M. and Kilian, L. (2001). “Size Distortion of Tests of the Null Hypothesis of Stationarity: Evidence and Implication for the PPP Debate”, Journal of International Money and Finance, 20: 639-657.

Chaiechi, T. (2012). “Financial development shocks and contemporaneous feedback effect on key macroeconomic indicators: A post Keynesian time series analysis”, Economic Modelling, 29(2): 487–501.

Chakraborty, I. (2008). “Does Financial Development Cause Economic Growth? The Case of India”, South Asia Economic Journal, 9: 109-139.

Chang, T. (2002). “Financial Development and Economic Growth in Mainland China: a Note on Testing Demand-following or Supply-leading Hypothesis”, Applied Economics Letters, 9(13): 869-873.

Chang, T. and Caudill, S. B. (2005). “Financial Development and Economic Growth: the Case of Taiwan”, Applied Economics, 37(12): 1329-1335.

Choe, C. and Moosa, I.A. (1999). “Financial System and Economic Growth: the Korean Experience”, World Development 27(6):1069–1082.

Colombage, S. (2009). “Financial markets and economic performances: Empirical evidence from five industrialized economies”, Research in International Business and Finance, 23: 339–348.

Darrat, A.F. (1999). “Are Financial Deepening and Economic Growth Causally Related? Another Look at the Evidence”, International Economic Journal 13 (3): 19–35.

Demetriades, P.O. and Hussein, K.A. (1996). “Does Financial Development Causes Economic Growth? Time Series Evidence from 16 Countries” ,Journal of Development Economics, 51: 387–411.

Elliot G., Rothenberg T., Stock J. (1996). “Efficient Tests for an Autoregressive Unit Root”, Econometrica, 64: 813–836

Global Financial Development Database (2016). [Online] Available at < http://www.worldbank.org/en/publication/gfdr/data/global-financial-development-database >, accessed on 28 June 2016.

Goldsmith, R. W. (1969). Financial structure and development. New Haven, CT: Yale Univ. Press.

Graff, M. (1999). “Financial Development and Economic Growth—a New Empirical Analysis”, Dresden discussion paper series in Economics, Nr. 5/99 (Technische Universitat Dresden).

Granger, C. W. J. (1969). “Investigating Causal Relations by Econometric Models and Cross-spectral Methods”, Econometrica 37 (3): 424–438.

Habibullah, M.S. and Eng, Y. (2006). “Does Financial Development Cause Economic Growth? A Panel Data Dynamic Analysis for the Asian Developing Countries”, Journal of the Asia Pacific Economy 11 (4): 377−393.

Hassan, M.K., Sanchez, B. and Yu, J.S. (2011), “Financial Development and Economic Growth: New Evidence from Panel Data”, The Quarterly Review of Economics and Finance 51 (2011): 88–104.

He, Z. and Maekawa, K. (1999). “On Spurious Granger Causality”, Economic Letters, 73(3): 307–313.

Ho, S.Y. and Iyke, B.N. (2016). “On the Causal Links between the Stock Market and the Economy of Hong Kong,” Working Papers 591, Economic Research Southern Africa.

Hondroyiannis, G., Lolos, S. and Papapetrou, E. (2005). “Financial Markets and Economic Growth in Greece, 1986–1999”, Journal of International Financial Markets, Institutions and Money,15:173–188.

Hong Kong Monetary Authority. (2016). [Online] Available at <http://www.hkma.gov.hk/eng/key-functions/banking-stability/banking-policy-and-supervision/three-tier-banking-system.shtml >, accessed on 2 July 2016.

Hong Kong Monetary Authority Annual report. (2015). [Online] Available at <http://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2015/18_AnnexandTables.pdf>, accessed on 2 July 2016.

Hong Kong Monetary Authority Annual report. (2007). [Online] Available at <http://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2007/annex_tables.pdf>, accessed on 2 July 2016.

Hong Kong Monetary Authority Annual report. (2001). [Online] Available at <http://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2001/Annex_Table.pdf>, accessed on 2 July 2016.

Hong Kong Monetary Authority Annual report. (1997). [Online] Available at http://www.hkma.gov.hk/eng/publications-and-research/annual-report/1997/table03.shtml>, accessed on 2 July 2016.

Hua, G.L. and Randhawa, D. S. (2006). ‘The banking sectors in Hong Kong and Singapore: What has liberalization wrought? An X-efficient study’ Saw Centre for Financial Studies Working Paper:06-03.

Hsueh, S., Hu, Y., & Tu, C. (2013). “Economic growth and financial development in Asian countries: A bootstrap panel granger causality analysis”, Economic Modelling, 32(3): 294–301.

Ibrahim M. H. (2007). “The Role of the Financial Sector in Economic Development: the Malaysian Case”, International Review of Economics (2007) 54: 463-483.

Jao, Y.C. (2003). ‘Financial reform in Hong Kong’, Chapter 6 in Maximilian J.B. Hall (ed.), The International Handbook on Financial Reform, Edward Elgar Publishing, Cheltenham.

Jiang, G., Tang, N., Law, E. and Sze, A. (2003). “Determinants of Bank Profitability in Hong Kong”, HKMA Research Memorandums, Hong Kong.

Jiang, G., Wong, J., Tang, N. and Sze, A. (2004), “Banking Sector Competition in Hong Kong Measurement and Evolution over Time” , HKMA Research Memorandums, Hong Kong.

Jung, W. (1986). “Financial Development and Economic Growth: International Evidence,” Economic Development and Cultural Change , 34: 333–346 (January).

Krause, L. B. (1988). “Hong Kong and Singapore: Twins or Kissing Cousins”, Economic Development and Cultural Change, 36(3), S45-S66.

Kwan, S.H. (2003). “Impact of Deposit Rate Deregulation in Hong Kong on the Market Value of Commercial Banks”, Journal of Banking and Finance, 27(12): 2231-2248.

Lee, B.S. (2012). “Bank-based and Market-based Financial Systems: Time-series Evidence,” Pacific-Basin Finance Journal, 20:173–197.

Liang, Q. and Teng, J.Z. (2006). “Financial Development and Economic Growth: Evidence from China”, China Economic Review, 17: 395–411.

Lucas Jr., R. E. (1988). “On the Mechanics of Economic Development” , Journal of Monetary Economics, 22: 3–42.

McKinnon, R. I. (1973). Money and Capital in Economic Development, Washington, D.C., The Brookings Institution.

Menyah, K., Nazlioglu, S., & Wolde-Rufael, Y. (2014). “Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach”, Economic Modelling, 37(2): 386–394.

Meyer, D.R. (2015). The world cities of Hong Kong and Singapore: Network hubs of global finance. International Journal of Comparative Sociology doi:10.1177/0020715215608230

Patrick, H.T. (1966). “Financial Development and Economic Growth in Underdeveloped Countries”, Economic Development and Cultural Change, 14(1):174–189.

Phiri, A., (2015). “Asymmetric cointegration and causality effects between financial development and economic growth in South Africa”, Studies in Economics and Finance, 32(4 ): 464 – 484.

Pradhan, R. P., Arvin, M. B., Norman, N. R., & Hall, J. H. (2014). “The dynamics of banking sector and stock market maturity and the performance of Asian economies”, Journal of Economic and Administrative Sciences, 30(1):16–44.

Robinson, J., (1952). The Generalisation of the General Theory in: The Rate of Interest and other Essays. McMillian, London.

Rousseau, P.L. and Wachtel, P. (2000). “Equity Markets and Growth: Cross-country Evidence on Timing and Outcomes, 1980-1995”, Journal of Business and Finance 24 (Nov.): 1933-57.

Schumpeter, J.A., (1912), Theorie derWirtschaftlichen Entwicklung [The Theory of Economic Development]. Dunker & Humblot, Leipzig. (Translated by Redvers Opie, Cambridge, MA, Harvard University Press, 1934).

Schwert, W. (1986). “Test for Unit Roots: A Monte Carlo Investigation”, Journal of Business and Economic Statistics, 7: 147-159.

Sehrawat, M. & Giri, A K. (2015). “Financial development and economic growth: empirical evidence from India”, Studies in Economics and Finance, 32(3): 340 – 356.

Shan, J., Morris, A. and Sun, F. (2001). “Financial Development and Economic Growth: an Egg-and-Chicken Problem”, Review of International Economics, 9(3): 443–454.

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

Taylor, P.J. (2005). Leading world cities: Empirical evaluations of urban nodes in multiple networks. Urban Studies 42(9): 1593–1608.

Thangavelu, S. M., Jiunn, A.B. and James (2004). “Financial Development and Economic Growth in Australia: an Empirical Analysis”, Empirical Economics, 29:247–260.

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

Tsang, S., 2004. A Modern History of Hong Kong, I.B. Tauris & Co Ltd, London.

Waqabaca, C. (2004). “Financial Development and Economic Growth in Fiji”, Working Paper 2004/03 (December). Economics Department, Reserve Bank of Fiji.

World Development Indicators (2016). [Online] Available at <http://data.worldbank.org/products/wdi >, accessed on 28 June 2016.

Wolde-Rufael, Y. (2009). “Re-examining the financial development and economic growth nexus in Kenya” , Economic Modelling, 26:1140–1146.

Yamada, H. (1998). “A Note on the Causality between Exports and Productivity: an Empirical Reexamination”, Economics Letters, 61: 111-4.

Young, A. (1992). “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore”, NBER Macroeconomics Annual 1992, Vol. 7:13-64.

Zang, H. and Kim, Y.C. (2007). “Does Financial Development Precede Growth? Robinson and Lucas Might Be Right”, Applied Economics Letters, 14:15–19.