Financial Sector Development and Economic Growth Nexus in South Asian Middle Income Countries (SAMICs)
In this paper we have made an attempt to explore the relationship between financial sector development and economic growth, using a panel data of South Asian middle income countries for the years 1980-2013. The macroeconomic data include real GDP index as an indicator of economic growth, proxies for financial sector development - domestic credit by banking sector/GDP, domestic credit to private sector/GDP, net inflows of FDI/GDP, M2/GDP and market capitalization/GDP; and control variables such as fixed capital formation/GDP, investment/GDP, and inflation in consumer prices/GDP. The results indicate that the domestic credit provided by banking sector has a significant positive relationship with economic growth in both directions but domestic credit to the private sector is associated with the economic growth in forward direction only, which confirms dearth in credit allocation in the region and suggests weak financial regulation and supervision. As far as the stock market developments are concerned, the results indicate that the stock market capitalization and liquidity have a significant role in growth and economic growth induces the stock market capitalization (size). Both the forms of investment (domestic and FDI), contribute significantly to economic growth in either direction. Stronger financial institutions, fixed capital formation and low inflation are crucial controlling growth factors.
Financial Sector Development,Economic Growth, Panel Unit Root, Panel Co-integration, DOLS and FMOLS
Abdelhafidh, S. (2013). Potential financing sources of investment and economic growth in North African countries: A causality analysis. Journal of Policy Modelling, 35 (1), 150-169.
Abu-Bader, S., & Abu-Qarn, A. M. (2008). Financial development and economic growth: empirical evidence from MENA countries. Review of Development Economics, 12, 803-817.
Ahmed, E., & Malik, A. (2009). Financial Sector Development and Economic Growth: An Empirical Analysis of Developing Countries. Journal of Ecnomic Cooperation and Development, 30 (1), 17-40.
Al-Awad, M., & Harb, N. (2005). Financial Development and Economic Growth in the Middle East. Applied Financial Economics, 15, 041-1051.
Ang, J., & McKibbin, W. J. (2007). Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, February, 1-19.
Arestis, P., Demetriades, P., & Luintel, K. (2001). Financial Development and Economic Growth:The Role of Stock Markets. Journal of Money, Credit and Banking, 33, 16-41.
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2000). A New Database on Financial Development and Structure. World Bank Economic Review, 14, 597-605.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2005). Does Financial Liberalization Spur Growth? Journal of Financial Economics, 77, 3-55.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2001). Emerging Equity Markets and Economic Development. Journal of Development Economics, 66, 465-504.
Bolbol, A., Fatheldin, A., & Omram, M. (2005). Financial Development, Structure, and Economic Growth: The Case of Egypt,1974-2002. Research in International Business and and Finance, 2, 123-138.
Boulila, G., & Trabelsi, M. (2004). The Causality Issue in the Finance and Growth Nexus: Empirical Evidence from Middle East and North African Countries. Review of Middle East Economics and Finance, 2, 123-138.
Breitung, J. (2000). The local power of some unit root tests for panel data. In H. B. Baltagi, Nonstationary Panels, Panel Cointegration, and Dynamic Panels (Vol. 15, pp. 161-178). Amsterdam: JAI Press.
Chakraborty, I. (2008). Financial Developemnt and Economic Growth in India: An Anaysis of the post reform period. Occasional Paper. Institute of Development studies, Kolkata.
Chakraborty, S., & Ray, T. (2006). Bank-based versus market-based financial systems: A growth-theoretic analysis. Journal of Monetary Economics, 53, 329-35-.
Chandavarkar, A. (1992). Of finance and development: Neglected and unsettled questions. World Development, 22, 133-142.
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20 (2), 249-272.
Chritopoulos, D., & Tsionas, E. G. (2004). Financial Development and Economic Growth:Evidence from Panel Unit Root and Cointegration Tests. Journal of Development Economics, 37, 55-74.
Deidda, L., & Fattouh, B. (2006). Banks, financial markets and growth. Journal of Financial Intermediation, September, 1-31.
Demetriades, P., & Hussein, K. (1996). Does Financial Development Cause Economic Growth? Time Series Evidence from 16 Countries. Journal of Development Economics, 51, 387-411.
Estrada, G., Park, D., & Ramayandi, A. (2010). Financial Development and Economic Growth in Developing Asia. ADB Economics Working Paper Series , No. 233.
Ghali, K. (1999). Financial development and economic growth: The Tunisian experience. Review of Development Economics, 3 (3), 310-322.
Goldsmith, R. (1969). Financial Structure and Development. New Haven, CT: Yale University Press.
Greenwood, J., & Smith, B. (1997). Financial markets in development, and the development of financial markets. Journal of Economic Dynamics and Control, 21, 145-181.
Habibullah, M. (1999). FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN ASIAN COUNTRIES. Savings and Development, 23 (3), 279-291.
Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. Econometrics Journal, 3 (2), 148-161.
Hasan, I., Koetter, M., & Wedow, M. (2009). Regional growth and finance in Europe: Is there a quality effect of bank efficiency? Journal of Banking and Finance, 33 (8), 1446-1453.
Hicks, J. (1969). A Theory of Economic History. Oxford: Clarendon Press.
Hussain, F., & Chakrabortry, D. K. (2012). Causality between Financial Development and Economic Growth: Evidence from an Indian State. The Romanian Economic Journal, Year XV (45), 27-45.
Im, K., Pesaran, M., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.
Jun, S. (2012). Financial Development and Output Growth:A Panel Study for Asian Countries. Journal of East Asian Economic Integration, 16 (1), 97-115.
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90, 1-44.
Kao, C., & Chiag, M. H. (2000). On the estimation and inference of a cointegrated regression in panel data. In B. H. Baltagi, Nonstationary Panels, Panel Cointegration, and Dynamic Panels in Advances in Econometrics (pp. 179-222). Amsterdam: JAI Press (Elsevier Science).
Kar, M., Nazlioglu, S., & Agir, H. (2011). Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis. Economic Modelling, 28 (1), 685-693.
Ke, L. (2010). Relationship between Financial System Reform and Economic Development in China. Public Policy Review, 6 (3), 557-579.
King, R., & Levine, R. (1993). Finance and Growth: Schumpeter might be right. Quarterly Journal of Ecnonomics, 108, 717-738.
Koetter, M., & Wedow, M. (2010). Finance and growth in a bank-based economy: Is it quantity or quality that matters? Journal of International Money and Finance, 29, 1529-1545.
La Porta, R., Lopez-de-Silanes, F., & Shliefer, A. (2002). Government ownership of Commercial Banks. Journal of Finance, 57, 265-301.
Levin, A., Lin, C., & Chu, J. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108, 1-24.
Levine, R. (2005). Finance and Growth: Theory, Evidence, and Mechanisms. In P. Aghion, & S. Durlauf, The Handbook of Economic Growth. Amsterdam: North-Holland.
Levine, R. (1991). Stock markets, growth, and tax policy. Jouranl of Finance, 66, 1445-1465.
Levine, R., & Zervos, S. (1998). Stock Markets, Banks, and Economic Growth. American Economic Review, 88, 537-558.
Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and economic growth: Causes and causality. Journal of Monetary Economics, 46, 31-77.
Liang, Q., & Teng, J. (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.
Madala, G., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61 (4), 631-652.
Miller, M. (1998). Financial Markets and Economic Growth. Journal of Applied Corporate Finance, 11, 8-14.
Pedroni, P. (2004). Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20, 597-625.
Phillips, P. B., & Hansen, B. E. (1990). Statistical Inference in Instrumental Variables Regression with I(1) Processes. Review of Economics Studies, 57, 99-125.
Robinson, J. (1952). The Rate of Interest and other Essays. London: Mcmillan.
Rousseau, P., & Wachtel, P. (1998). Financial Intermediation and Economic Performance. Journal of Money, Credit and Banking, 30, 657-678.
Saikkonen, P. (1992). Estimation and Testing of Cointegrated Systems by an Autoregressive Approximation. Econometric Theory, 8, 1-27.
Schumpeter, J. A. (1912). The Theory of Economic Development. translated by R. Opie, Cambridge, MA: Harvard University Press, 1934.
Sinha, D., & Macri, J. (2001). Financial development and economic growth: The case of eight Asian countries. Retrieved from MPRA Paper No. 18297, posted 2. November 2009 06:09 UTC: http://mpra.ub.uni-muenchen.de/18297/