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The Direction of Causality Between Financial Development and Economic Growth

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  • César Calderón
  • Lin Liu

Abstract

This paper employs the Geweke decomposition test on pooled data of 109 developing and industrial countries from 1960 to 1994 to examine the direction of causality between financial development and economic growth. The paper finds that (1) financial development generally leads to economic growth; (2) the Granger causality from financial development to economic growth and the Granger causality from economic growth to financial development coexist; (3) financial deepening contributes more to the causal relationships in the developing countries than in the industrial countries; (4) the longer the sampling interval, the larger the effect of financial development on economic growth; (5) financial deepening propels economic growth through both a more rapid capital accumulation and productivity growth, with the latter channel being the strongest.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 184.

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Date of creation: Oct 2002
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Handle: RePEc:chb:bcchwp:184

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  1. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  2. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
  3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  4. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  5. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  6. Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
  7. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
  8. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  9. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  10. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
  11. Jung, Woo S, 1986. "Financial Development and Economic Growth: International Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 34(2), pages 333-46, January.
  12. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  13. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
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