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Do banking sector and stock market development matter for economic growth?

  • Joshua Cave
  • Kausik Chaudhuri
  • Subal C. KumbhakarEmail author
Article
  • 24 Downloads

Abstract

Financial development as a concept is multifaceted with no clear measurement or definition. Inference via individual proxies may result in an incomplete understanding of the relationship between financial development and economic growth, since sole proxies are unlikely to capture the true capacity of financial development. To address this issue, this paper utilizes a multiple indicators multiple causes (MIMIC) model to create a more complete measure of financial development. In doing this, we treat banking sector and stock market developments as two latent indicators of financial development and use the MIMIC model to predict them which are used as their proxies. Using data from 101 countries over the period 1990–2014, we use the predicted values of the two latent variables as regressors, among other controls, in the growth regression. We find a robust negative relationship between banking sector development and economic growth, whereas the effect of stock market development on economic growth is positive up to a threshold after which the effect becomes negative.

Keywords

Financial development Economic growth Multiple indicators multiple causes 

JEL Classification

C22 G20 O40 

Notes

Compliance with ethical standards

Conflict of interest

We declare that we have no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  • Joshua Cave
    • 1
  • Kausik Chaudhuri
    • 1
  • Subal C. Kumbhakar
    • 2
    Email author
  1. 1.Department of EconomicsLeeds University Business SchoolLeedsUK
  2. 2.Department of EconomicsSUNY BinghamtonBinghamtonUSA

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