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Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries

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Author Info
Kemal, A.R.
Qayyum, Abdul
Hanif , Muhammad N.

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Abstract

This paper examines the empirical relationship between financial development and economic growth for high income countries. The study focuses on both indirect finance and direct finance, separately as well as jointly. Applying the methodology of Nair-Reichert and Weinhold (2001) for causality analysis in heterogeneous panel data, two sets of results are reported. First, the evidence regarding the relationship between financial development and economic growth from a contemporaneous non-dynamic fixed effects panel estimation is mixed. Negative and statistically significant estimates of the coefficient of the inflation and financial development interaction variable indicate that financial sector development may even be harmful to economic growth when inflation is rising. Second, in contrast with the recent evidence of Beck and Levine (2003), heterogeneous panel causality analysis applied on a refined model indicates that there is no definite evidence that finance spurs economic growth or growth spurs finance. Most of our findings are in line with the Lucas (1988) view that the importance of financial matters is over-stressed. The only exception is the case of activity in stock markets where our result supports the Robinson (1952) view that finance follows enterprise.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10198.

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Date of creation: 2004
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Publication status: Published in The Lahore Journal of Economics Summer:1.12(2007): pp. 1-34
Handle: RePEc:pra:mprapa:10198

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Find related papers by JEL classification:
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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  1. 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. [Downloadable!] (restricted)
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  2. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1996. "Inflation, growth, and financial intermediation," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 41-58. [Downloadable!]
  3. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Blackwell Publishing, vol. 14(4), pages 395-426, September. [Downloadable!] (restricted)
  4. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2001. "Legal Theories of Financial Development," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 483-501.
  5. Jose De Gregorio & Federico Sturzenegger, 1994. "Credit Markets and the Welfare Costs of Inflation," NBER Working Papers 4873, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Hsiao, C. & Mountain, D.C. & Tsui, K.Y. & Chan, M.W.L., 1989. "Modeling Ontario Regional Electricity System Demand Using A Mixed Fixed And Random Coefficients Approach," Papers m8906, Southern California - Department of Economics.
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  7. 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. [Downloadable!] (restricted)
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  8. van den Berg, Hendrik, 1997. "The relationship between international trade and economic growth in Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 1-21. [Downloadable!] (restricted)
  9. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I. [Downloadable!] (restricted)
  10. Arellano, M, 1987. "Computing Robust Standard Errors for Within-Groups Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(4), pages 431-34, November.
  11. Kevin Lee & M. Hashem Pesaran & Ron Smith, . "Growth and Convergence in a Multi-County empirical Stochastic Solow Model," Discussion Papers in Economics 96/14, Department of Economics, University of Leicester.
  12. A. R. Kemal, 2000. "Financing Economic Development," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 293-311. [Downloadable!]
  13. Elisabeth Huybens & Bruce D. Smith, 1997. "Inflation, Financial Markets and Long-Run Real Activity," Working Papers 9707, Centro de Investigacion Economica, ITAM.
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  14. Sangmok Choi & Bruce D. Smith & John H. Boyd, 1996. "Inflation, financial markets and capital formation," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 9-35. [Downloadable!]
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  15. Khan, Mohsin S. & Senhadji, Abdelhak S. & Smith, Bruce D., 2006. "Inflation And Financial Depth," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 165-182, April. [Downloadable!]
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  16. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August. [Downloadable!] (restricted)
    Other versions:
  17. Jose De Gregorio & Federico Sturzenegger, 1994. "Financial Markets and Inflation under Imperfect Information," IMF Working Papers 94/63, International Monetary Fund.
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  18. 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. [Downloadable!] (restricted)
  19. Diana Weinhold, 2004. "A Dynamic “Fixed Effects” Model for Heterogeneous Panel Data," Econometrics 0410003, EconWPA. [Downloadable!]
  20. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
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  21. 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. [Downloadable!] (restricted)
  22. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April. [Downloadable!] (restricted)
  23. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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