The role of financial innovation on economic growth in developing countries has not been actively pursued. Financial intermediation credit to private sector, stock market and financial reforms exert significant positive impact on. Wide range of literature is available on the important role of fiscal policy in fastening economic growth. The impact of financial development on economic growth in. Research journal of finance and accounting issn 22221697 paper issn 22222847 online vol 3, no 10, 2012.
Second, we conduct multivariate causality tests between the growth rate of income and the growth rates of the financial development variables. G00, g10, o40, o41 1 introduction finance a ects the real economy in several ways, hence understanding the mechanisms through which it im. In the theoretical part of the paper, by developing a solowswan growth model augmented with financial markets in the tradition of wu, hou, and cheng 2010, we show that debt from credit markets and equity from stock markets are two long run. The purpose of this paper is to provide a theoretical framework that integrates the endogenous growth and functions of financial markets and institutions theory in order to investigate how the financial market and the banking sector develop indicators that affect economic growth in these countries.
Abstract this report provides empirical evidence on the relation ship between financial development and economic growth in the european union and the euro area. Others were keener to totally dismiss the impact of financial development on economic growth. Second, because financial markets are forwardlooking, financial development in 1960 may be the consequence of anticipated economic growth of the next few decades. The impact of financial development on economic growth in japan. Financial development and economic growth in developing. The data cover the regressions according to the maximum of 110 countries and at least 10. This study contributes to understanding the role of financial development on economic growth theoretically and empirically. Introducing a new broadbased index of financial development. In the section that follows we briefly discuss the theoretical arguments and the empirical evidence surrounding financial structure and economic growth. Financial development and economic growth 19 countries had negative growth in one or two years or even throughout the entire period e.
January 2003 aassociate professor ofeconomics, vanderbilt university, box 1819 station b, nashville, tn 37235, usa and research. Similarly, full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development. The influence and effects of financial development on. Financial development and economic growth in the mena region. The relationship between financial development and economic growth has recently received emphasis from numerous theoretical and empirical studies in both developed and developing countries. This paper looks at the relationship between financial development and economic growth using time series data for eight asian countries. The model is calibrated to match facts about the u. Our results are robust to changes in the financial development indicators and disaggregation of financial liberalization index. First, we estimate augmented production functions where a financial development variable is added. There are two schools of thought who explain the role of public policy but in two.
Financial development and the instability of open economies. Thus, countries that are going through a phase of financial development may become more unstable in the short run. Goldsmith 1969 was the first to document a positive. The impact of financial development on economic growth. Financial integration, financial development and economic growth. Financial development, financial openness, and economic growth this paper examines the importance of financial development and openness. Financial development and economic growth in tanzania. This paper reexamines the empirical relationship between financial development and economic growth. Economic fluctuations and growth program how important is financial development for economic development. Economist in the macroeconomics and finance research. Puzzles in financial development and economic growth. The only attempts to assess happiness come from qualitative surveys, where individuals are asked to say how happy they feel. Results indicate that the type of financing fund receiver matters in the financial depth growth link. The empirical growth literature has come up with numerous explanations of crosscountry difference in growth, including factor accumulation, resource endowments, and the degree of macroeconomic stability, educational attainment, institutional.
Historical perspectives on financial development and. This paper investigates the impact of financial development on economic growth using time series data in cameroon. Historical perspectives on financial development and economic growth by peter l. However, the empirical implications of these reforms have been divergent. The relationship of the financial sector to economic growth globally has recently been the subject of considerable empirical and theoretical research. The supplyleading hypothesis argues that financial deepening causes real economic growth.
Financial development and economic growth in ghana. Download this paper open pdf in browser add paper to my library. The impact of financial sector development on economic. This investigation was carried out using three common indicators of financial development broad money, depositgdp and domestic. Financial development and economic growth an empirical. Although various studies have questioned the causal nexus between financial development and economic growth, most theoretical and empirical reasoning suggests a positive first order relationship levine, 1997. Stemming from the financegrowth nexus, literature suggests that. Results indicate that the type of financing fund receiver matters in the financial depthgrowth link. For decades, african economies have embarked on financial sector reforms. The few works that have been published on africa, especially in subsaharan africa, have generally concluded that financial development should lead to economic growth. Most of the attention and research on household finance and economic development in the past two decades has been on the impact of microcredit.
Impact of financial development on economic growth in iran. By identifying such a link between financial sector development and economic growth, and by identifying the channels through which the effects of the. Thisarticle decomposes the welldocumented relationship between financialdevelopment and growth. Ourresults suggest that indicators of financial development arecorrelated with. On economic growth and development 245 happiness that purchasing power delivers, let alone about the changes in the amount of satisfaction that individuals obtain without having to use monetary means of payment. The impact of financial deepening on economic growth issuu. Financial development, financial openness, and economic growth.
Quantifying the impact of financial development on. In recent years there has been substantial theoretical and empirical work on the role that financial markets play in fostering economic growth and development. Theory and empirical evidence make it difficult to conclude that the financial system merely and automatically responds to economic activity, or that financial development is an inconsequential addendum to the process of economic growth. The impact of financial sector development on economic growth. Previous research conducted focusing on the latin american region found support for both a negative and a positive impact of financial development on economic growth. We estimate the common, country, and idiosyncratic factors that drive the dynamics and comovement of financial development and economic growth across 89 countries in three different income groups, namely industrial countries inds, emerging market economies emes, and other. Imports results obtained using the generalized method of moments dynamic panel show that. Financial development and economic growth econstor. In this reverse causality view, financial development may be a mere leading indicator of economic growth rather than a cause.
Again, odhiambo 2008 with ardl bound testing procedure tested the dynamic causal relationship between stock market development and economic growth for south africa with data from 19712007. Other things being equal, it is financial development that follows output growth and not the opposite. In view of the important role that economic growth plays in the development process of the economy of ghana, it is important to understand the nature and determinants of economic growth. It discusses the results of an empirical analysis between both variables and economic growth. Financial development and economic growth in developing asia. The results indicate that the positive effect of financial development on longrun growth continues to decline as the financial sector becomes more liberalized. Most empirical models generally indicate that welldeveloped financial markets enhance the efficiency of resource allocation and faster longrun growth via several channels.
The general consensus of an everincreasing number of empirical and theoretical works on economic growth is that a welldeveloped financial system plays an essential role in fostering a countrys. Financial development and economic growth in the caricom sub region varuna ramlala, patrick kent watsonb, 1 a department of economics, university of the west indies, st. Stemming from the finance growth nexus, literature suggests that financial innovation has. Financial development and economic growth are shown to be closely related as discussed by previous literature starting from schumpeter 1911. Financial development, financial openness, and economic. There is even evidence that the approach focuses on the ties between growth and the level of financial development is a good predictor of quality of the functions provided by the financial system.
This research aims to examine the impact of financial development on economic growth in the context of the mena countries. Jun 10, 2015 this study seeks to verify the shortrun and longrun impact of financial sector development on economic growth and also to verify the gap of financial development that separates cameroon and an emergent country like south africa. The evidence becomes stronger and even more convincing after studies by levine 1997 and levine and zervos 1996 that find the level of financial development as a good predictor for future economic. How important is financial development for economic development. Financial development and economic growth in nigeria fidelis. Celebrated by many as an effective development tool, microcredit was the basis for the 2006 nobel peace prize.
Financial integration, financial development and economic. Three groups exist in the literature regarding the causal relationship between financial development and economic growth patrick 1966. Indeed, the role of financial development is considered by many to be the key to economic development and growth demirguc kunt and levine 1996a. The relationship between financial markets and economic growth has been a subject of great interest and debate among economists for so many years that even up to date researches are still contacting research on this subject. Financial development and economic growth in the caricom. Overall, our evidence supports the notion that further development of the financial sector matters for sustaining developing asias growth in the. The results also indicate that the impact of financial development on the regions growth is not noticeably different than elsewhere, and the impact has weakened since the asian financial crisis. Financial development, economic growth, transitional dynamics jel classi cation. Introducing a new broadbased index of financial development1 prepared by katsiaryna svirydzenka authorized for distribution by petya koeva brooks january 2016 abstract there is a vast body of literature estimating the impact of financial development on economic growth, inequality, and economic stability. The role of stock markets utilizing time series methods and data from five developed economies, we examine the relationship between stock market development and economic growth, controlling for the effects of the banking system and stock market volatility. We employ a dynamic panel data analysis for 88 countries over the period of 1973 to 2005. Pdf the impact of saving and financial development on. Evans, green, and murinde 2002 evaluate the contribution of human capital and financial development to economic growth in a panel of 82 countries using the translog production function as a framework for estimating the relationships among. Financial development and economic growth in the mena.
The study considers a number of measures of financial development that. Analysis of the financial development gap between cameroon and south africa. Introduction the relationship between economic growth and financial development has been an extensive subject of empirical research. Financial development and economic growth jrc publications. Financial development and economic growth 689 lief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential side show, responding passively to economic growth and industrialization. This paper addresses the issue whether excessive liberalization has caused the financial development to lose its effectiveness in generating economic growth. A welldeveloped financial sector facilitates financial transactions. Theory and a survey of evidence article pdf available in journal for studies in economics and econometrics 351.
Quantifying the impact of financial development on economic. Syngrou 6, 17671, athens, greece bdepartment of economics, athens university of economics and business, athens, greece. Hence the relationship between financial development and economic growth appears to be essential. A costly state verification model of financial intermediation is presented to address this question. Quantifying the impact of financial development on economic development jeremy greenwood, juan m. In section 3, i briefly present the data, its properties, and the econometrics model applied in this paper. The role of financial development on economic growth has also received considerable attention at empirical level. This article examines the impact of financial development on economic growth, with consider other variables affecting the economic growth, such as ratio of commercial, domestic investment and interest rate. The question is whether financial development causes economic growth or.
326 160 279 26 307 444 116 1194 534 1034 733 347 1032 810 1338 779 1505 410 952 1224 163 744 460 1388 401 964 960 62 1141 623 300 1341 282 1294 560 210 404 817 1529 1113 868 1298 180 696 558 1007 1440