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Roles played by financial development in economic growth: application of the flexible regression model

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Abstract

This study presents the nonlinear relationship that exists between financial development and economic growth. This study applies the flexible nonlinear regression model of Hamilton (Econometrica 69(3):537–573, 2001) because it imposes no specification restrictions. Two empirical results are obtained. First, an inverted U-shaped relation between banking sector development and economic growth is identified. Namely, the two variables are positively linked before the turning point, but negatively linked after it. Second, a positive relationship with asymmetric √-shape between stock market development and economic growth is found.

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Authors and Affiliations

  1. Department of Finance, National Taiwan University Gonguan, Taipei, 116, Taiwan, ROC

    Chung-Hua Shen

  2. Department of Finance, National Sun Yat-Sen University, Kaohsiung, Taiwan, ROC

    Chien-Chiang Lee

  3. Department of International Trade, Chung Yuan Christian University, 200, Chung Pei Rd., Chung Li, 32023, Taiwan, ROC

    Shyh-Wei Chen

  4. Department of Money and Banking, National Chengchi University, Muzha, Taipei, 116, Taiwan, ROC

    Zixiong Xie

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  1. Chung-Hua Shen
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  2. Chien-Chiang Lee
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  3. Shyh-Wei Chen
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  4. Zixiong Xie
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Correspondence to Chien-Chiang Lee.

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Shen, CH., Lee, CC., Chen, SW. et al. Roles played by financial development in economic growth: application of the flexible regression model. Empir Econ 41, 103–125 (2011). https://doi.org/10.1007/s00181-010-0353-z

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