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Financial development and economic growth: evidence from the European Union

Author

Listed:
  • George E. Halkos
  • Marianna K. Trigoni

Abstract

Purpose - The purpose of this paper is to detect the relationship between finance and growth in the European Union countries, by searching the direction of causations. Design/methodology/approach - The growth of real sector is expressed by real GDP per capita growth (dgdpcap), while the size of the financial system by the ratio of domestic credit to GDP (domcregdp). The deposit rate and inflation are used as indexes of monetary policy. This paper estimates vector autoregressive models, based on the Akaike information criterion (AIC) and the Schartz criterion (SC) criteria and cointegration tests are conducted. To test for stationarity, the paper uses Im, Pesaran and Shin (IPS) test. In case with variables are integrated of order one I(1), the paper tests whether they are cointegrated using Pedroni's methodology. Findings - In the short run, the size of the financial system does not directly seem to affect growth, although its increase seems to lead to an increase in the deposit rate and consequently to a decrease in real GDP per capita. However, according to the vector error correction estimates, the significance of the error correction coefficients implies that there is a relationship between real sector, financial sector and monetary policy in the long run. Originality/value - Pedroni's methodology, which allows for heterogeneity across members and residual serial correlation, is used for the first time, in Europe, regarding the above-mentioned variables. According to the results, there seems to be a long-term relationship, between finance, growth and monetary policy.

Suggested Citation

  • George E. Halkos & Marianna K. Trigoni, 2010. "Financial development and economic growth: evidence from the European Union," Managerial Finance, Emerald Group Publishing, vol. 36(11), pages 949-957, September.
  • Handle: RePEc:eme:mfipps:v:36:y:2010:i:11:p:949-957
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    References listed on IDEAS

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    1. 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.
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    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    5. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
    6. 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.
    7. Roger Atindehou & Jean Pierre Gueyie & Edoh Kossi Amenounve, 2005. "Financial intermediation and economic growth: evidence from Western Africa," Applied Financial Economics, Taylor & Francis Journals, vol. 15(11), pages 777-790.
    8. John Thornton, 1996. "Financial deepening and economic growth in developing economics," Applied Economics Letters, Taylor & Francis Journals, vol. 3(4), pages 243-246.
    9. 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 (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
    10. Hansen, Bruce E., 1992. "Efficient estimation and testing of cointegrating vectors in the presence of deterministic trends," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 87-121.
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    Cited by:

    1. Ghassan Omet, 2011. "Stock Market Liquidity: Comparative Analysis of The Abu Dhabi Stock Exchange and Dubai Financial Market," Working Papers 655, Economic Research Forum, revised 12 Jan 2011.
    2. repec:lan:wpaper:1108 is not listed on IDEAS
    3. M. Sani,, Nur Fatin Najwa & Ismail, Fathiyah & W. Mahmood, Wan Mansor, 2014. "Causal relationship between financial depth and economic growth: evidence from Asia-Pacific Countries," MPRA Paper 62188, University Library of Munich, Germany.
    4. Akinci, Gönül Yüce & Akinci, Merter & Yilmaz, Ömer, 2014. "Financial Development-Economic Growth Nexus : A Panel Data Analysis Upon Oecd Countries," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(1), pages 33-50, June.

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    Keywords

    Banking; Economic growth; Finance; European Union;

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