Abstract
We examine whether dynamic impacts of banks and stock markets on economic growth are related to the level of country development. Using annual data from 15 industrial and 15 emerging countries over the period from 1976 to 2005, we find that banking development and stock market development may have distinct short-and long-run impacts on economic growth at various stages of country development. Financial development is not always a panacea for economic growth. Most importantly, our findings suggest that the fully functional tools to render stable growth for a country may depend on the level of the country’s development.
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Notes
Loayza and Ranciere (2006) demonstrate that the PMG estimator makes gains in consistency and efficiency over other error correction estimators.
If the restriction does not hold, the PMG estimator is inconsistent. In such a case, the conventional mean group (MG) estimator proposed by Pesaran and Smith (1995) can be used.
Component countries of each of the two groups remain unchanged when they are sorted according to their individual time series average of GNI from 1976 to 2005.
Drawing on prior finance-growth studies, we also add control variables into the model when data are available. Following Yanikkaya (2003) and Rajan and Zingales (2003), we add into the model the ratio of exports plus imports to GDP, denoted by TRADE. This variable is to measure the trade intensity of an economy. Yanikkaya (2003) finds that trade openness may stimulate economic development. We also include into the model the ratio of government consumption to GDP, denoted by GOV, to measure the size of a government. Loayza and Ranciere (2006) document that government size has a negative influence on economic growth. Our empirical results, nevertheless, remain qualitatively unchanged when these control variables are left out of the model.
The authors thank an anonymous reviewer for providing such an insightful economic interpretation.
We do not follow methods of De Gregorio and Guidotti (1995), and Odedokun (1996) since the number of data observations engendered by these two approaches is too small to guarantee meaningful conclusions. Furthermore, given the finding of Beck and Levine (2004) that the length of the averaging intervals can have a nontrivial effect on the result, this therefore would have little impact on the validity of our conclusion. Our analysis based on the method of Rioja and Valev (2004a) alone will be good enough to demonstrate effects of different methodologies on the result.
In particular, the finance-growth relationship is insignificantly positive when financial development is proxied by liquid liabilities, but insignificantly negative when financial development is measured by private credit. To simplify our presentation, the regression result based on the GMM dynamic panel model of Rioja and Valev (2004b) is not reported but available upon request.
For a detailed description on the relative advantage of the PMG method, see Loayza and Ranciere (2006).
We also conduct a similar analysis on the 11 countries with an average credit-GDP greater than 80 percent. These countries are Austria, Germany, Japan, Malaysia, Netherlands, Portugal, Spain, Switzerland, Thailand, and UK. The result shows that the finance-growth relationship turns significantly positive, indicating that the 100 percent threshold of private credit is critical to the finance-growth relationship. The significantly positive relationship in fact comes to our expectation since 8 of the 11 sample countries are from our developed countries group.
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Cheng, SY., Ho, CC. & Hou, H. The Finance-growth Relationship and the Level of Country Development. J Financ Serv Res 45, 117–140 (2014). https://doi.org/10.1007/s10693-012-0153-z
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DOI: https://doi.org/10.1007/s10693-012-0153-z