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Does Financial Development 'Lead' Economic Growth? The Case of China

Author

Listed:
  • Jordan Shan

    (Guanghua School of Management, Peking University)

  • Jianhong Qi

    (School of Economics, Shandong University)

Abstract

Using a Vector Autoregression (VAR) approach, we examine the impact of financial development on economic growth in China. Innovation accounting (variance decomposition and impulse response function) analysis is applied to examine interrelationships between variables in the VAR system and, therefore, differs from the more usual approach. We find that financial development comes as the second force (after the contribution from labor input) in leading economic growth in China. This study has supported the view in the literature that financial development and economic growth exhibit a two-way causality and hence is against the so-called ¡°finance-led growth¡± hypothesis. The study of this kind in the case of China is limited; it therefore provides an interesting advance in the literature on the finance-growth nexus.

Suggested Citation

  • Jordan Shan & Jianhong Qi, 2006. "Does Financial Development 'Lead' Economic Growth? The Case of China," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 197-216, May.
    • Handle: RePEc:cuf:journl:y:2006:v:7:i:1:p:197-216
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Development; Economic Growth; VAR;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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