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Does financial development precede growth? Robinson and Lucas might be right

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  • Hyoungsoo Zang
  • Young Chul Kim

Abstract

This paper studies whether there is any causal link between financial development indicators and economic growth, using Sims-Geweke causality tests performed in the large panel data set provided by Levine, Loayza and Beck. In sharp contrast to their findings, no evidence was found of any positive unidirectional causal link from financial development indicators to economic growth. On the contrary, a substantial indication that economic growth precedes subsequent financial development was found. As argued by Robinson, financial development might primarily follow economic growth, as a result of increased demand for financial services. Although the present result does not quite imply that the role of financial development in the development process is not important, the bottom line is that a more balanced approach to studying the relationship between growth and finance needs to be adopted. As termed by Lucas, the importance of financial development in economic growth might be very badly 'over-stressed'. Robinson and Lucas might be right.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 14 (2007)
Issue (Month): 1 ()
Pages: 15-19

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Handle: RePEc:taf:apeclt:v:14:y:2007:i:1:p:15-19

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  1. Magnus Blomstrom & Robert E. Lipsey & Mario Zejan, 1996. "Is Fixed Investment the Key to Economic Growth?," NBER Working Papers 4436, National Bureau of Economic Research, Inc.
  2. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  3. Tsangyao Chang, 2002. "Financial development and economic growth in Mainland China: a note on testing demand-following or supply-leading hypothesis," Applied Economics Letters, Taylor & Francis Journals, vol. 9(13), pages 869-873.
  4. Emilia Mazur & W. Robert & J. Alexander, 2001. "Financial sector development and economic growth in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 545-549.
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Cited by:
  1. Marques, Luís Miguel & Fuinhas, José Alberto & Marques, António Cardoso, 2012. "Interação entre o mercado acionista e o crescimento económico: Uma apreciação do caso português (1993-2010)
    [Interaction between the stock market and economic growth: An assessment of the Por
    ," MPRA Paper 39808, University Library of Munich, Germany.
  2. Nicholas Odhiambo, 2010. "Finance-investment-growth nexus in South Africa: an ARDL-bounds testing procedure," Economic Change and Restructuring, Springer, vol. 43(3), pages 205-219, August.
  3. Oludele Akinloye Akinboade & Emilie Chanceline Kinfack, 2013. "Interest rate reforms, financial deepening and economic growth in Cameroon: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 45(25), pages 3574-3586, September.
  4. Henryk Gurgul & £ukasz Lach, 2012. "Financial Development and Economic Growth in Poland in Transition: Causality Analysis," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(4), pages 347-367, August.
  5. N M Odhiambo, 2008. "Financial Development in Kenya: a Dynamic Test of the Finance-led Growth Hypothesis," Economic Issues Journal Articles, Economic Issues, vol. 13(2), pages 21-36, September.
  6. Verhoef, Grietjie & Greyling, Lorraine & Mwamba, John, 2013. "SAVINGS and economic growth: a historical analysis of the relationship between savings and economic growth in the CAPE Colony economy, 1850-1909," MPRA Paper 47819, University Library of Munich, Germany, revised 19 Jun 2013.
  7. Claude Berthomieu & Anastasia Ri, 2009. "Process and Effects of Financial Liberalization in Transition Countries: A Selective Literature Survey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(4), pages 453-473, December.

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