Non‐linear finance–growth nexus

This paper revisits the question of whether the finance–growth nexus varies with the stages of economic development. Using a novel threshold regression with the instrumental variables approach proposed by Caner and Hansen (2004) to the dataset used in Levine et al. (2000) we detect overwhelming evidence in support of a positive linkage between financial development and economic growth, and this positive effect is larger in the low‐income countries than in the high‐income ones. The data also reveal that financial development tends to have stronger impacts on capital accumulation and productivity growth in the low‐income countries than in the high‐income ones. The findings are robust to alternative financial development measures and conditioning information sets.     

Does too much government spending depress the economic development of transition economies? Evidences from dynamic panel threshold analysis

This paper investigates the relationship between government size and economic growth and determines the optimal level of government spending to maximize economic growth. The paper applies a dynamic panel data analysis based upon a threshold model to test the threshold effect of government spending in 26 transition economies over the period spanning 1993–2016. According to the analysis results, government expenditures have a threshold effect on economic growth, and there is a non-linear relationship depicted as an Armey curve in these transition economies. The findings indicate that a government size above the threshold government spending level adversely affects economic growth, while a government size below the threshold level has a positive effect. Furthermore, there is a statistically significant relationship between the two variables above and below that optimal level, even if we divide the sample into developed and developing countries. Our findings suggest that governments in transition economies should consider optimal government size at around the estimated threshold level to support sustainable economic growth.     

Inflation Effects on Finance-Growth Link: A Panel Smooth Threshold Approach

This paper proposes an original framework to examine whether the strength of the relationship between financial development and economic growth, widely documented in the recent empirical literature, varies with the inflation rate. Using a Panel Smooth Threshold Regression for 71 developed and developing countries over the period 1960–2004, we find a non-linear link between financial development and economic growth: three equilibriums are identified with inflation rate. Then, there is an inflation threshold, for which finance ceases to increase economic growth. Our results suggest that for an inflation rate higher than 20%, economic growth is not, or is negatively, affected by financial development, whereas the impact of finance on growth is positive and significant for an inflation level below 10%.     

Financial Development and Economic Activity in Advanced and Developing Open Economies: Evidence from Panel Cointegration

This study considers the effects of financial development on output in a panel cointegration framework, focusing on the implications of trade and financial openness. Our analysis indicates that after controlling for cross‐sectional dependence, the typical relationship between finance and output does not hold in the long run. This relationship, however, is re‐established once we account for economic openness. While trade openness emerges as more important for developing countries, financial openness is more important for advanced economies. In the long run, causality runs from financial development to output in the advanced economies, while in developing economies causality is bidirectional. There is no short‐run causality between financial development and output, however.     

Financial development and economic growth nexus: A rejoinder to Tsionas

Tsionas has offered a more revisionist approach to the empirics of the nexus between financial development and economic growth following our paper entitled ‘Financial development and economic growth nexus: A revisionist approach’. In the current note, we engage Tsionas’ approach in tandem with our original finance–growth nexus review. We concur with Tsionas’ approach and reiterate that the debate on the relationship between financial development and economic growth remains a complex terrain both on the theoretical and empirical fronts.     

Foreign direct investment and economic growth: Is more financial development better?

We investigate the extent to which an increase in financial development affects the positive effect of foreign direct investment on economic growth. Although the financial sector is beneficial for economic growth, the effect of further financial development on growth is found to become insignificant. Using a dynamic panel threshold model on 62 middle- and high-income countries spanning the period 1987–2016, we re-examine the possible nonlinearity between finance, foreign direct investment, and growth. Consistent with the “vanishing effect” of financial development, we find significant evidence that foreign direct investment fosters growth in general, but the growth effect of foreign direct investment becomes negligible when the ratio of private sector credit to gross domestic product exceeds 95.6%. This finding is robust to different econometric methods, various subsamples and interaction analyses, and distinct financial development indicators.     

Revisiting the finance–growth nexus: the Turkish case, 1980–2010

In Turkey, the empirical results on the link between financial development and economic growth are mixed. The existing studies do not take into account the fact that Turkey has experienced endemic political and economic instabilities over extended periods. This study aims to analyse the role of macroeconomic instability and public borrowing on the finance–growth nexus in Turkey by using time series econometric techniques over the 1980–2010 period. In doing so, we attempt to extend the existing literature by taking into account the role of macroeconomic instability as well as public borrowing. Our results reveal that there are additional – albeit indirect – channels between finance and growth via the effects of macro instability and public borrowing on financial development and economic growth. After taking into account the effects of overall instability and public borrowing, we found that growth–financial development relationship is bidirectional and permanent. In other words, in Turkish case, economic growth and financial development are jointly determined. Thus, our results shed some light on the ambiguity of the evidence on the link between financial development and economic growth for Turkey.     

Revisiting the Effects of Remittances on Bank Credit: A Macro Perspective

We investigate the effect of remittances on bank credit in developing countries. Understanding this link is important in view of the growing relevance of remittances as a source of external finance and of the beneficial impact that financial intermediation is likely to have on economic growth. Our contribution is twofold. First, we present a theoretical model of bank credit in a hypothetical remittances‐receiving country where: (1) the banking sector is imperfectly competitive; and (2) bank rates change infrequently because of the presence of adjustment costs. We show that in equilibrium, the relationship between remittances and bank‐credit is likely to be non‐linear. Second, we look at the evidence using a panel data set for a large group of developing and emerging economies over the period 1970–2009. We find that at initially low levels of remittances, an increase in remittances reduces the volume of credit extended by banks. However, at sufficiently high levels of remittances, the effect becomes positive. The turning point of the relationship occurs at a level of remittances of about 2.5% of GDP, which would imply that approximately 50% of our sample lies to each side of this threshold.     

The Dynamic Relationship Between Corruption–Inflation: Evidence From Panel Vector Autoregression

This paper aims to explain the mixed causality nexus between corruption and inflation. For that, we apply a panel vector autoregression model on a large sample of 180 countries over the period 1996–2014. Using two corruption indexes and subsample estimations, results provide evidence that the inflation–corruption nexus is bidirectional. The causal effect is more important from corruption to inflation. Interactions remain significant but heterogeneous across subsamples with different income levels. The corruption effect is persistent only in low–middle income economies and its adverse effect on inflation is weaker in high‐income economies. The two‐way relationship between inflation and corruption reflects the inability to control inflation and the situation of the poverty trap in some countries.     

Do oil consumption and economic growth intensify environmental degradation? Evidence from developing economies

The purpose of this article is to empirically investigate the impact of economic growth, oil consumption, financial development, industrialization and trade openness on carbon dioxide (CO₂) emissions, particularly in relation to major oil-consuming developing economies. This study utilizes annual data from 1980 to 2012 on a panel of 18 developing countries. Our empirical analysis employs robust panel cointegration tests and a vector error correction model (VECM) framework. The empirical results of three panel cointegration models suggest that there is a significant long-run equilibrium relationship among economic growth, oil consumption, financial development, industrialization, trade openness and CO₂ emissions. Similarly, results from VECMs show that economic growth, oil consumption and industrialization have a short-run dynamic bidirectional feedback relationship with CO₂ emissions. Long-run (error-correction term) bidirectional causalities are found among CO₂ emissions, economic growth, oil consumption, financial development and trade openness. Our results confirm that economic growth and oil consumption have a significant impact on the CO₂ emissions in developing economies. Hence, the findings of this study have important policy implications for mitigating CO₂ emissions and offering sustainable economic development.     

中国金融发展与外贸关系的面板协整检验和因果分析

基于跨省面板数据,运用面板协整理论和面板因果检验方法分析了中国金融发展与对外贸易之间的关系.多种协整检验方法一致表明,金融发展与出口贸易、金融发展与进口贸易之间都存在长期均衡稳定关系;而基于面板误差修正模型的Granger因果检验则表明金融发展与对外贸易之间同时存在长、短期双向因果关系.这意味着在金融深化改革和贸易增长方式调整的特殊历史时期,保持金融和贸易政策的有效组合具有十分重要的意义.     

The causal relationship between financial development and economic growth in Africa

ABSTRACT

Previous empirical studies on the causal relationship between financial development and economic growth are not instructive given their failure to unearth the causality trend across the different time periods. Using a more recently developed and robust indicator of financial development, we revisit the causal relationship between financial development and economic growth within the framework of a frequency-domain spectral causality technique which allows the causality to vary across time. Using data from 47 African countries over the period 1980–2016, our findings largely suggest that, even though there is some evidence of demand-following, supply-leading and feedback hypotheses, for most part, we find strong support of neutrality hypothesis. Thus, financial development and economic growth at most frequency levels evolve independently. We infer that caution must be exercised in making general conclusions about the causal nexus between financial development and economic growth.     

Macroeconomic consequences of state fragility in sub‐Saharan Africa

Are poor macroeconomic outcomes primarily the result of economic policies, or of deeper underlying state fragility problems in sub‐Saharan Africa? We attempt to answer this question by using carefully specified dynamic panel regression techniques to show how state fragility conditions help to explain the differences in the macroeconomic performance of sub‐Saharan African economies, and to identify the most plausible mechanisms of transmission. We find that countries with greater fragility suffer higher macroeconomic volatility and crisis; they also experience weaker growth. When we disaggregate state fragility into its various components, we find that it is the security and social components that have the strongest causal impact on macroeconomic outcomes, while the political component is, at best, weak. Therefore, we conclude that it is state fragility conditions, and not necessarily macroeconomic policies, that are of first‐order importance in explaining the differences in macroeconomic performance for African countries. The knock‐on effects are mostly mediated through the fiscal channel, the aid channel, and the finance channel. Accordingly, we recommend that interventions in fragile states should best focus on exploiting the potential for using fiscal policy, aid, and finance as instruments to improve macroeconomic outcomes in sub‐Saharan Africa.     

Financial development and economic growth: long‐run equilibrium and transitional dynamics

We analyze the impact of financial development on economic growth. Differently from previous studies that focus mainly on balanced growth path outcomes, we also analyze the transitional dynamics of our model economy by using a finance‐extended Uzawa–Lucas framework where financial intermediation affects both human and physical capital accumulation. We show that, under certain rather general conditions, economic growth may turn out to be non‐monotonically related to financial development (as suggested by the most recent empirical evidence) and that too much finance may be detrimental to growth. We also show that the degree of financial development may affect the speed of convergence, which suggests that finance may play a crucial role in determining the length of the recovery process associated with exogenous shocks. Moreover, in a special case of the model, we observe that, under a realistic set of parameters, social welfare decreases with financial development, meaning that even when finance positively affects economic growth the short‐term costs associated with financial activities more than compensate their long‐run benefits.     

Economic freedom–growth nexus in European Union countries

This study examines the economic freedom and economic growth nexus in a panel of 28 European Union countries. We investigate the relationship between growth and different components of economic freedom, measured in five major areas of the Economic Freedom of the World index. The aim of the article is to assess which aspects of economic freedom – and to what extent – contribute to economic growth in the EU. Our empirical analyses suggest that the results are sensitive to the method of estimation. Using the Generalized Method of Moments estimator which allows addressing endogeneity, we found a positive relationship between economic growth and four of the five aspects of economic freedom: security of property rights, quality of monetary policy, freedom to trade and regulatory policies.     

The dynamics of financial development,globalisation, economic growth and life expectancy in sub‐Saharan Africa

The importance of life expectancy is recognised in the development economics literature because of its increasing effects on labour productivity and economic growth in long‐run. However, no published study to date empirically examines the nonlinear relationships between globalisation, financial development, economic growth and life expectancy in sub‐Saharan African (SSA) countries. Therefore, our study intends to fill this gap by using non‐parametric cointegration test and multivariate Granger causality test towards a non‐linear empirical understanding of the factors affecting the life expectancy. We consider the case of 16 sub‐Saharan African economies using annual data over the period 1970–2012. The empirical analysis indicates that financial development, globalisation and economic growth appear to have a positive impact upon life expectancy in sub‐Saharan African economies, except for Gabon and Togo. Our empirical findings may provide insightful policy implications towards improving population health conditions which are vital for promoting the productivity of labour force and long‐run economic growth in sub‐Saharan African countries. In light of these policy implications, governments should incorporate globalisation, financial development and economic growth as key economic instruments in formulating sustainable developmental policy to promote life expectancy for the people in sub‐Saharan African countries.     

ASIAN FINANCIAL LINKAGE: MACRO‐FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activity? To answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz and gauge the degree of interaction in both financial markets and real economic activity among Asian economies. We first show that the degree of the international spillover in stock markets is uniform, irrespective of the groups of countries concerned, such as the G3 and ASEAN4. This suggests the importance of global common shocks in stock markets. We then discuss the macro‐finance dissonance. In stock and bond markets, the United States has been the main driver of fluctuations. However, China has emerged as an important source of fluctuations in real economic activity.     

Causal Linkages among the Product Diversification of Exports,Economic Globalization and Economic Growth

This paper examines causal relationships between economic globalization, the three indices for product diversification of exports (Theil index, intensive margin and extensive margin) and economic growth in the unbalanced panel data framework in 139 countries over the period 1970–2010. We also consider the subgroup of the countries related to the income levels and run the panel Granger non‐causality tests for heterogeneous panels. The empirical results indicate that there is a bidirectional causal relationship between economic globalization and economic growth. There is also a significant causal relationship that runs from all three indices for the diversification of exports to economic growth. After implementing various robustness checks, we observe that diversification of exports and economic globalization are positively related with economic growth merely in the upper middle economies.     

Technology choices and growth: testing New Structural Economics in Transition Economies

We explore the relationship between development policies, finance and growth as approached by New Structural Economics (NSE) with special reference to Transition Economies (TEs). On a sample of 164 economies for 1963–2009, our analysis confirms NSE propositions that the type of development policies, as captured by the Technology Choice Index (TCI), has a significant effect on long-term growth. However, this differs for TEs as a whole and its subgroups. Further to this, using a sample of 94 countries for 1985–2009, we provide a first empirical test of the relationship between growth, TCI and financial structure distortions and we show that there is a negative relationship between financial distortions and TCI on the one hand and medium-term growth on the other hand. We also find that the negative effect of a higher ratio of TCI on medium-term growth is partly mitigated, although not eliminated, by moderate level of financial sector distortions. This points towards some positive externalities of simultaneous financial and industrial sector distortions, at least in the medium run. However, TEs are shown to differ from the rest of the sample as financial distortions play a more pronounced direct negative effect on medium-term growth in these countries.     

The role of institutions in finance curse: Evidence from international data

This paper investigates the effect of banking sector development on economic growth in a panel of 87 countries, paying particular attention to the role of institutions in reducing the finance curse phenomenon. The dynamic generalized method-of-moments (GMM) results indicate that institutions play an important role in mediating the positive relationship between banking sector development and growth. This suggests that the marginal impact of financial development on growth depends on institutional quality. Using the four-way partition of institutions classified by Rodrik (2005), we also find that resilient market-regulating, market-stabilizing, and market-creating institutions act as mediators to the financial market in facilitating growth. The results are robust to using alternative institutions indicators, estimation strategies, and stopping the sample before the 2007-2008 global financial crisis.