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Does Financial Development 'Lead' Economic Growth? The Case of China

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  • Jordan Shan

    (Guanghua School of Management, Peking University)

  • Jianhong Qi

    (School of Economics, Shandong University)

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    Abstract

    Using a Vector Autoregression (VAR) approach, we examine the impact of financial development on economic growth in China. Innovation accounting (variance decomposition and impulse response function) analysis is applied to examine interrelationships between variables in the VAR system and, therefore, differs from the more usual approach. We find that financial development comes as the second force (after the contribution from labor input) in leading economic growth in China. This study has supported the view in the literature that financial development and economic growth exhibit a two-way causality and hence is against the so-called ¡°finance-led growth¡± hypothesis. The study of this kind in the case of China is limited; it therefore provides an interesting advance in the literature on the finance-growth nexus.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 7 (2006)
    Issue (Month): 1 (May)
    Pages: 197-216

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    Handle: RePEc:cuf:journl:y:2006:v:7:i:1:p:197-216

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    Keywords: Financial Development; Economic Growth; VAR;

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    Cited by:
    1. Gurgul, Henryk & Łukasz, Lach, 2011. "Financial development and economic growth in Poland in transition: causality analysis," MPRA Paper 38034, University Library of Munich, Germany.
    2. Polat, Ali & Shahbaz, Muhammad & Ur Rehman, Ijaz & Satti, Saqlain Latif, 2013. "Revisiting Linkages between Financial Development, Trade Openness and Economic Growth in South Africa: Fresh Evidence from Combined Cointegration Test," MPRA Paper 51724, University Library of Munich, Germany, revised 25 Nov 2013.
    3. Shahbaz, Muhammad & Abosedra, Salah & Sbia, Rashid, 2013. "Energy Consumption, Financial Development and Growth: Evidence from Cointegration with unknown Structural breaks in Lebanon," MPRA Paper 46580, University Library of Munich, Germany.
    4. Kyophilavong, Phouphet & Salah Uddin, Gazi & Shahbaz, Muhammad, 2014. "The Nexus Between Financial Development and Economic Growth in Lao PDR," MPRA Paper 57308, University Library of Munich, Germany, revised 14 Jul 2014.
    5. Shahbaz, Muhammad & Khan, Saleheen & Tahir, Mohammad Iqbal, 2013. "The dynamic links between energy consumption, economic growth, financial development and trade in China: Fresh evidence from multivariate framework analysis," Energy Economics, Elsevier, vol. 40(C), pages 8-21.
    6. Wolde-Rufael, Yemane, 2009. "Energy consumption and economic growth: The experience of African countries revisited," Energy Economics, Elsevier, vol. 31(2), pages 217-224.
    7. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.

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