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Stock Market Development And Economic Growth: The Causal Linkage

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Author Info

  • Guglielmo Maria Caporale

    ()
    (London South Bank University)

  • Peter G. A Howells

    (University of the West of England)

  • Alaa M. Soliman

    (Leeds Metropolitan University)

Registered author(s):

    Abstract

    This paper addresses the question: does stock market development cause growth? It examines the causal linkage between stock market development, financial development and economic growth. The argument is that any inference that financial liberalisation causes savings or investment or growth, or that financial intermediation causes growth, drawn from bivariate causality tests may be invalid, as invalid causality inferences can result from omitting an important variable. The empirical part of this study exploits techniques recently developed by Toda and Yamamoto (1995) to test for causality in VARs, and emphasises the possibility of omitted variable bias. The evidence obtained from a sample of seven countries suggests that a well-developed stock market can foster economic growth in the long run. It also provides support to theories according to which well-functioning stock markets can promote economic development by fuelling the engine of growth through faster capital accumulation, and by tuning it through better resource allocation.

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    File URL: http://www.jed.or.kr/full-text/29-1/02_J665_.PDF
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    Bibliographic Info

    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 29 (2004)
    Issue (Month): 1 (June)
    Pages: 33-50

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    Handle: RePEc:jed:journl:v:29:y:2004:i:1:p:33-50

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    Related research

    Keywords: Financial Development; Economic Growth; Stock Market; Causality Testing; VARs; Incomplete Systems;

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    References

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    1. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    2. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    3. César Calderón & Alberto Chong & Norman Loayza, 1999. "Determinants of Current Account Deficits in Developing Countries," Working Papers Central Bank of Chile 51, Central Bank of Chile.
    4. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    5. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
    6. Dailami, Mansoor & Atkin, Michael, 1990. "Stock markets in developing countries : key issues and a research agenda," Policy Research Working Paper Series 515, The World Bank.
    7. Rousseau, P. L. & Wachtel, P., 2000. "Equity markets and growth: Cross-country evidence on timing and outcomes, 1980-1995," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1933-1957, December.
    8. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
    9. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
    10. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
    11. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
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    Cited by:
    1. Laurent Cavenaile & Christian Gengenbach & Franz Palm, 2014. "Stock Markets, Banks and Long Run Economic Growth: A Panel Cointegration-Based Analysis," De Economist, Springer, vol. 162(1), pages 19-40, March.
    2. Rudra P. PRADHAN & Mak B. ARVIN & Bele SAMADHAN & Shilpa TANEJA, 2013. "The Impact of Stock Market Development on Inflation and Economic Growth of 16 Asian Countries: A Panel VAR Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 203-218.
    3. André Farber & Nguyen Huu Tu & Tran Tri Dung & Quan Hoang Vuong, 2008. "The financial storms in Vietnam's transition economy: a reasoning on the 1991-2008 period," Working Papers CEB 08-023.RS, ULB -- Universite Libre de Bruxelles.
    4. Marques, Luís Miguel & Fuinhas, José Alberto & Marques, António Cardoso, 2013. "Does the stock market cause economic growth? Portuguese evidence of economic regime change," Economic Modelling, Elsevier, vol. 32(C), pages 316-324.
    5. Stanislaw Kaszuba, 2010. "Prospects for the Future Growth of the NewConnect Stock Market," Equilibrium, Uniwersytet Mikolaja Kopernika, vol. 2, pages 117-126.
    6. Phiri, Andrew, 2014. "Asymmetric co-integration and causality effects between financial development and economic growth in South Africa," MPRA Paper 53055, University Library of Munich, Germany.

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