Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis

This paper investigates the direction of causality between financial development and economic growth in the Middle East and North African (MENA) countries. The panel causality testing approach, developed by Kónya (2006) [Kónya, L. (2006), exports and growth: Granger causality analysis on OECD countries with a panel data approach, Economic Modelling, 23, 978–992], based on the Seemingly Unrelated Regressions and Wald tests with the country specific bootstrap critical values, is applied to the panel of fifteen MENA countries for the period 1980–2007. In order to capture the different aspects of financial development, six different indicators are used. Empirical results show that there is no clear consensus on the direction of causality between financial development and economic growth for all measurements of financial development and it is also observed that the findings are country specific.     

Does Regional Financial Development Matter for Growth? Evidence from Indian States

The paper investigates finance–growth relationship across 26 Indian states over the period 1981–2012 in a panel setting. We use four indicators of financial development: credit-GSDP ratio, deposit-GSDP ratio, credit-deposit ratio and branch density and apply panel generalized method of moments (GMM) techniques. We observe positive and significant effect of financial development on economic growth and our findings are robust across alternate indicators of financial development and model specifications. Our findings highlight pivotal role played by financial intermediaries in fostering savings mobilization and financing investment activities across states through channels of deposit mobilization, expansion of credit and greater branch expansion in unbanked locations and consequent reduction of transactions costs. These findings are consistent with observations that much of India’s superior growth performance is attributed to high level of domestic savings. The paper also takes care of issues of bias and precision of various GMM estimators arising out of small sample typically prevalent in empirical growth models like ours.     

Do remittances not promote growth? A finite mixture-of-regressions approach

This paper re-examines the impact of remittance inflows on growth using data for developing countries over the period 1970–2010. We relax the hypothesis that all countries follow the same unique growth regime in favor of multiple regimes, and test whether the impact of remittances on growth depends on the growth regime to which an economy belongs. We follow the recent literature that has applied the finite-mixture-of-regressions method in other circumstances to endogenously identify growth regimes, correcting for unobserved heterogeneity. We find that our data are best described by an econometric model with two different growth regimes: one in which remittances have a positive and significant marginal impact on growth; and another in which the impact of remittances is insignificant. The analysis of the determinants of the probability of being in the remittances growth-enhancing regime shows that being a Sub-Saharan African country increases significantly this probability, while financial development moderately reduces this probability but with strong reservations on the statistical significance of the estimates on the different indicators of financial development.     

A contribution to the empirics of convergence in real GDP growth: the role of financial crises and exchange-rate regimes

This paper investigates the convergence in real gross domestic product growth focusing on the impact of financial crises (i.e. banking crises, currency crises and debt crises) and nominal exchange-rate regimes (i.e. fixed, intermediate and flexible) on convergence. To that end, we compute four convergence indicators (σ-convergence, γ-convergence, absolute β-convergence and conditional β-convergence) for 163 countries classified into four income groups during the period 1970–2011. The results suggest that (i) there is evidence in favour of σ-convergence and γ-convergence only for high-income countries; (ii) absolute and conditional β-convergence are present in each of the four income groups of the countries under study; (iii) exchange-rate regimes seem to play some role in upper-middle and lower-middle-income countries; and (iv) financial crises have a negative and significant impact on GDP growth independently of the income level of the countries.     

Financial liberalization,disaggregated capital flows and banking crisis: Evidence from developing countries

The aim of this paper is to examine whether financial liberalization has triggered banking crises in some developing countries. We focus in particular on the role of capital flows as their volatilities threat economic stability and growth. In the empirical model, based on panel logit estimation, we use the two common financial liberalization indicators (defacto and dejure) for a panel of 58 developing countries observed during the period 1984–2007. Unlike the previous studies, this paper reveals that both indicators of financial liberalization did not trigger banking crises. However, the results show that foreign debt liabilities to total liabilities and foreign direct investment liabilities to total liabilities increase the likelihood of banking crises.     

Financial sector development and domestic savings in South Asia

Given the limited capital flows to developing countries in South Asia, domestic savings is the primary source of investment and growth. Financial sector development and access to financial institutions are important determinants of savings ratios in developing countries. In this context, we empirically examine the role of financial development on savings ratios of five South Asian countries after controlling for other relevant variables for the period 1975–2010 and also for two sub-periods—the pre-reforms period (1975–1991) and the post-reforms period (1992–2010). We find that financial sector development positively affects total and private savings in South Asia along with per capita income, share of agriculture and foreign savings. Results also support the humped-shaped relationship between financial development and savings. The causality results support that financial development leads to higher savings mobilisation in South Asia.     

Finance–growth nexus: does causality withstand financial liberalization? Evidence from cointegrated VAR

The main finding of the paper is that, contrary to Rousseau and Wachtel (Economic growth and financial depth. Is the relationship extinct already? UNU-Wider discussion paper no. 2005/10, 2005), a long-run equilibrium relationship between financial and economic development is identified with data up to 2006—well over the financial openness boom of the nineties—in countries whose history is characterized by numerous years of high inflation and/or episodes of crisis or other structural change. Also, financial openness, or lack thereof, proves to be an important feature both in explaining differences in sensitivity of financial development to capital accumulation and in determining the direction of causality between financial and economic development. The paper finds that bidirectional causality between economic and financial development is not as frequent an outcome as in Luintel and Khan (J Dev Econ 60:381–405, 1999), and in several cases, Joan Robinson’s (The generalization of the general theory in the rate of interest, and other essays, Macmillan, London, pp 67–142, 1952) statement on the primacy of economic development over finance is supported by the estimations.     

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.     

ARE FINANCIAL SECTOR POLICIES EFFECTIVE IN DEEPENING THE MALAYSIAN FINANCIAL SYSTEM?

This paper provides an empirical assessment of the effects of financial sector policies on development of the financial system in Malaysia over the period 1959–2005. The technique of principal component analysis is used to construct a summary measure of interest rate policies in order to account for the joint influence of various interest rate controls imposed on the Malaysian financial system. The results show that economic development, interest rate controls, and capital liquidity requirements positively affect the level of financial development. However, greater trade openness, higher statutory reserve requirements, and the presence of directed credit programs appear to be harmful for development of the Malaysian financial system. The results provide some support to the argument that some form of financial restraints may help promote financial development. (JEL E44, E58, O16, O53)     

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%.     

The post-crisis slump in the Euro Area and the US: Evidence from an estimated three-region DSGE model

The global financial crisis (2008–09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences—in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999–2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008–09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems.     

中国金融发展与农民收入增长

本文在对中国金融发展与农民收入增长进行制度和结构分析的基础上,运用1952—2003年的实际数据,对中国整体金融发展、农村金融发展与农民收入增长的关系进行了实证研究。结果显示:中国金融发展对农民收入增长具有显著的负效应,用金融发展与经济增长的正向作用关系直接替代金融发展与农民收入增长的关系,与我国经济发展的事实并不相符;同时,也验证了制度和结构分析所揭示的“中国金融发展中防止结构和功能失衡至关重要”的命题。在此基础上,文章就金融发展促进农民收入增长提出了简要的政策建议。     

The role of the financial system in the growth–inflation link: the OECD experience

This paper jointly estimates the effects of financial development and inflation on growth using both cross-section and time-series dimensions of the data on inflation, growth, and some banking and stock market indicators over the period 1961–1993 for a sample of OECD countries. Overall, the results indicate, first, that the long-run costs of inflation are not explained by policies of financial repression and, second, that if inflation affects growth through its interaction with financial market conditions, this is not the only (nor the most important) channel.     

A Socio‐Economic Profile of Families in the First Wave of the Longitudinal Study of Indigenous Children

‘Footprints in time’, the Longitudinal Study of Indigenous Children (LSIC), has been developed to provide insights into how Indigenous children's early years affect their development. Socio‐economic factors are at the core of many analyses of child development and well‐being and this article provides a socio‐economic profile of Indigenous families in the first wave of the LSIC. Utilising 12 indicators that are organised into three groups—primary carer, family income and financial stress—the article provides an extensive overview of the full range of socio‐economic data available in the LSIC. The article examines whether, when taken together, the different indicators tell a consistent story. It finds that, broadly, they do. The article raises some issues about the reporting of certain government payments and highlights the importance of family size when looking at family income. The article concludes by pointing to the potential for future research that these data present.     

Financial development and poverty reduction nexus: A cointegration and causality analysis in Bangladesh

This paper contributes to the literature by investigating the relationship between financial development, economic growth and poverty reduction in Bangladesh using quarter frequency data over the period of 1975–2011. This issue is of importance for developing economics given the role of financial sector in mobilizing and allocating savings into productive investments. We use an innovative empirical approach based on ARDL cointegration with structural breaks. Our findings show that a long-run relationship between financial development, economic growth and poverty reduction exists in Bangladesh. Financial development helps to reduce poverty, but its effect is not linear.     

Risk capital,private credit,and innovative production

Abstract Although ideas production plays a critical role for growth, there has been only a modicum of research on the role played by financial forces in fostering new inventions. Drawing on Schumpeterian growth theory, this paper tests the roles of risk capital and private credit in stimulating knowledge production. Using panel data for 77 countries over the period 1965–2009, we find that countries with more developed financial systems are more innovative. A stronger patent protection framework, on the other hand, curbs innovative production.     

Financial innovation,economic growth,and the consequences of macroprudential policies

We leverage a ‘catch-all’ measure of financial innovation—research and development spending in the financial sector—to assess the net relationship between financial innovation and economic growth and evaluate the influence of macroprudential policy on this relationship. Using a panel of 23 countries over the period of 1996–2014, our results demonstrate a net-positive relationship between financial innovation and gross capital formation. We find no evidence of a net-negative impact of financial innovation on economic growth, challenging the popular and political stigma surrounding financial innovation. We also find little robust evidence of macroprudential policy influencing the relationship between financial innovation and economic growth. Our results support a functional approach to the regulation of financial innovation, which improves the intermediation process, leading to increased capital formation.     

What matters in the finance–growth nexus of advanced economies? Evidence from OECD countries

Over the last decades, a large strand of finance and growth literature has provided ample evidence on the importance of financial deepening for economic development. Yet, recently, the focus of public debate has shifted towards the role of the financial system structure, an area in which empirical research remains relatively sparse and exploratory in nature. With this article, we aim to contribute to that debate by analysing the role the financial system structure plays in economic growth and risk. Focusing on stock markets and studying OECD economies over 1994–2013, we find that, ceteris paribus, financial systems with relatively larger stock markets facilitate economic growth and dampen economic risk. Our findings remain robust under application of instrumental variable and system generalized method of moments estimators, as well as when we use an alternative definition of stock market development, estimate median regressions, examine relatively high-frequency annual data, control for systemic banking crises or apply quadratic specifications. We find no such effect for private bond markets or private credit volume. Overall, our results suggest that financial system structure matters for the economic development of advanced economies and highlight the importance of a debate about the optimal structure of an economy’s financial system.     

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.     

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.