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Do banking sector and stock market development matter for economic growth?

Author

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  • Joshua Cave

    (Leeds University Business School)

  • Kausik Chaudhuri

    (Leeds University Business School)

  • Subal C. Kumbhakar

    (SUNY Binghamton)

Abstract

Financial development as a concept is multifaceted with no clear measurement or definition. Inference via individual proxies may result in an incomplete understanding of the relationship between financial development and economic growth, since sole proxies are unlikely to capture the true capacity of financial development. To address this issue, this paper utilizes a multiple indicators multiple causes (MIMIC) model to create a more complete measure of financial development. In doing this, we treat banking sector and stock market developments as two latent indicators of financial development and use the MIMIC model to predict them which are used as their proxies. Using data from 101 countries over the period 1990–2014, we use the predicted values of the two latent variables as regressors, among other controls, in the growth regression. We find a robust negative relationship between banking sector development and economic growth, whereas the effect of stock market development on economic growth is positive up to a threshold after which the effect becomes negative.

Suggested Citation

  • Joshua Cave & Kausik Chaudhuri & Subal C. Kumbhakar, 2020. "Do banking sector and stock market development matter for economic growth?," Empirical Economics, Springer, vol. 59(4), pages 1513-1535, October.
    • Handle: RePEc:spr:empeco:v:59:y:2020:i:4:d:10.1007_s00181-019-01692-7
    DOI: 10.1007/s00181-019-01692-7
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    More about this item

    Keywords

    Financial development; Economic growth; Multiple indicators multiple causes;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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