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Reexamining the Finance–Growth Relationship for a Developing Economy: A Time Series Analysis of Post-reform India

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  • Sabyasachi Kar
  • Kumarjit Mandal
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    Abstract

    The cross-country empirical literature on the finance-growth relationship has debated three propositions: (i) financial deepening has a strong impact on the growth process; (ii) measures of financial “activity” rather than the “size” of the sector plays a more significant role in the growth process; and (iii) financial structure (bank-based versus stock market-based) has no impact on the growth process at all. The present study reexamines the validity of these propositions for a developing economy. These propositions are tested for the post-reform Indian economy using the modified Pantula principle associated with the Vector Error Correction Model (VECM) methodology. [IEG Working Paper No. 313]. URL:[http://www.iegindia.org/].

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    Bibliographic Info

    Paper provided by eSocialSciences in its series Working Papers with number id:5058.

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    Date of creation: Jul 2012
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    Handle: RePEc:ess:wpaper:id:5058

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    Related research

    Keywords: Finance; Developing Economy; time series analysis; post-reform; India; finance-growth; financial structure; financial activity; Financial deepening; modified Pantula principle; goods and services; savings; banks; non-bank financial intermediaries; stock markets;

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    1. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    2. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
    3. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
    4. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    5. César Calderón & Lin Liu, 2002. "The Direction of Causality Between Financial Development and Economic Growth," Working Papers Central Bank of Chile 184, Central Bank of Chile.
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    7. 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.
    8. 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.
    9. Hjelm, Goran & Johansson, Martin W., 2005. "A Monte Carlo study on the pitfalls in determining deterministic components in cointegrating models," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 691-703, December.
    10. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
    11. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    12. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
    13. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    14. Philip Arestis & Ambika Luintel & Kul Luintel, 2010. "Financial structure and economic growth: evidence from time series analyses," Applied Financial Economics, Taylor & Francis Journals, vol. 20(19), pages 1479-1492.
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    Cited by:
    1. 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.
    2. Banerjee, Rajabrata & Roy, Saikat Sinha, 2014. "Human capital, technological progress and trade: What explains India's long run growth?," Journal of Asian Economics, Elsevier, vol. 30(C), pages 15-31.

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