nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2018‒07‒16
five papers chosen by
Georg Man

  1. Revisiting Finance and Growth in Transition Economies - A Panel Causality Approach By Michael Stemmer
  2. Is the lead-lag relationship between financial development and economic growth symmetric ? new evidence from Bangladesh based on ARDL ad NARDL By Zahir, Faathih; Masih, Mansur
  3. The Supermultiplier-Cum-Finance. Economic Limits of a Credit Driven System By Dejuán, Óscar; McCombie, John S.L.
  4. Will Financial Liberalization Trigger the First Crisis in the People’s Republic of China? Lessons from Cross-Country Experiences By Gou, Qin; Yiping, Huang
  5. Banking and Innovation: A Review By Lin, Chen; Liu, Sibo; Wei, Lai

  1. By: Michael Stemmer (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article provides new evidence on the relationship between financial development and economic growth in 15 Eastern European countries between 1994 and 2014. The analysis employs a panel Granger causality framework that is based on seemingly unrelated regression systems and Wald tests with country-specific bootstrap critical values. By relying on several financial development indicators, we find that finance primarily follows GDP per capita in transition economies, supporting a demand-driven hypothesis. In contrast, financial development in the form of financial monetization and credit extension exerts in the majority of countries a negative impact on economic growth. Moreover, a strong foreign bank presence seems to positively impact growth, presumably driven by more efficiency and prudential lending behavior.
    Keywords: Economic growth,financial development,transition countries,granger causality,bootstrap
    Date: 2017–05
  2. By: Zahir, Faathih; Masih, Mansur
    Abstract: The nexus between financial development and economic growth has been the subject of many literature. Researchers have tried to find if the causality is unidirectional, if so which variable causes the growth of the other or if it was bi-directional. However, the results of these researches have been conflicting and no definitive solution to this has been discovered. The purpose of this paper is to apply time series techniques to investigate this relationship. The focus of this study was based on Bangladesh because it was very recently classified by the UN as a developing country and such a study would help the government with critical information for formulating policies for its development. To the best of our knowledge, Bangladesh has not been the interest of such a study in the past. Time series techniques such as Autoregressive distributed lags (ARDL) and the more recent Non-linear autoregressive distributed lags (NARDL) were used. The results were paired with Variance decomposition techniques to strengthen the results. Annual data from 1972 to 2016 was obtained from the World Bank data bank. This study revealed that there is a strong positive co-integrating relationship between financial development and economic growth in Bangladesh and that the finance variable leads the economic growth variable suggesting a supply-leading hypothesis. Finally, the results revealed only a short run symmetry between the variables.
    Keywords: Financial Development, economic growth, symmetric, ARDL, NARDL
    JEL: C22 C58 G23
    Date: 2018–06–14
  3. By: Dejuán, Óscar (University of Castilla – La Mancha (UCLM)); McCombie, John S.L. (University of Cambridge, Cambridge, UK)
    Abstract: Credit explosion, debt overhang and asset bubbles, of the size observed in the period 1995-2008, have been a recurrent problem of advanced capitalism. In this paper we analyse the causes and consequences of over-indebtedness from a supermultiplier model that takes into account the debt-service. We contend that the accelerator of investment is a stable and stabilizing mechanism when investment depends on the expected increases in “permanent” demand. The problems of instability are rooted in the consumption-multiplier when it does not depend on fixed parameters (like the tax rate) but on coefficients that evolve endogenously; namely the debt-burden and the debt service. To control the financial sources of this instability, monetary authorities should prevent that credit rises systematically above the growth of nominal GDP.
    Keywords: Financial Instability; Supermultiplier; Post-Keynesian Economics; Sraffian Economics
    JEL: E11 E12 E32
    Date: 2018–07
  4. By: Gou, Qin (Asian Development Bank Institute); Yiping, Huang (Asian Development Bank Institute)
    Abstract: The People’s Republic of China (PRC) is beginning a new wave of financial liberalization, which is necessary to support strong economic growth, but will financial liberalization lead to major financial crises, as in many middle-income countries? We propose that financial liberalization generally lowers financial risks, especially for middle-income economies. Nevertheless, the pace of liberalization, quality of institutions, and regulatory structure also matter for outcomes of financial instability. From these findings, we draw some policy implications for the PRC: (1) further liberalization is important not only for economic growth but also for financial stability; (2) a gradual liberalization approach should work better, focusing on the sequencing of reforms; (3) the quality of institutions, especially strong market discipline, is also important for containing financial risks; and (4) it is better for the central bank to participate in financial regulation.
    Keywords: financial liberalization; financial crisis; financial instability
    JEL: G01 G18
    Date: 2018–03–08
  5. By: Lin, Chen (Asian Development Bank Institute); Liu, Sibo (Asian Development Bank Institute); Wei, Lai (Asian Development Bank Institute)
    Abstract: We summarize the major findings of empirical studies that examine the effect of banking development on innovation and highlight their relative contributions to our understanding of the various roles the banking sector plays in determining innovation. We reassess the effect of banking development and innovation, extending the scope of analysis to more granular dimensions of innovation and to Asian economies where financial markets are less developed. We find that while theoretical implications are generally indefinite about the effect of banking development on innovation, empirical findings are less ambiguous given their distinct focus of sample firms and the underlying channels investigated. The development conditions of financial markets also matter in drawing implications for the effect of financial institutions on innovation. Specifically, when the stock market is relatively less developed, as in most Asian economies, banks play a significant role in financing and promoting innovation. Therefore, it seems plausible for policy makers in these regions to strengthen the development of the banking sector and to improve the depth of the credit market. In this survey, we will summarize the major findings of the empirical studies that examine the effect of banking development on innovation and highlight their relative contributions to our understanding about the various roles that the banking sector plays in determining innovation. Then, we will reassess the effect of banking development and innovation.
    Keywords: banking development; innovation; financial markets
    JEL: G02
    Date: 2018–03–05

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