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Stock Market Development And Economic Growth: The Causal Linkage

  • Guglielmo Maria Caporale

    ()

    (London South Bank University)

  • Peter G. A Howells

    (University of the West of England)

  • Alaa M. Soliman

    (Leeds Metropolitan University)

Registered author(s):

    This paper addresses the question: does stock market development cause growth? It examines the causal linkage between stock market development, financial development and economic growth. The argument is that any inference that financial liberalisation causes savings or investment or growth, or that financial intermediation causes growth, drawn from bivariate causality tests may be invalid, as invalid causality inferences can result from omitting an important variable. The empirical part of this study exploits techniques recently developed by Toda and Yamamoto (1995) to test for causality in VARs, and emphasises the possibility of omitted variable bias. The evidence obtained from a sample of seven countries suggests that a well-developed stock market can foster economic growth in the long run. It also provides support to theories according to which well-functioning stock markets can promote economic development by fuelling the engine of growth through faster capital accumulation, and by tuning it through better resource allocation.

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    File URL: http://www.jed.or.kr/full-text/29-1/02_J665_.PDF
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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 29 (2004)
    Issue (Month): 1 (June)
    Pages: 33-50

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    Handle: RePEc:jed:journl:v:29:y:2004:i:1:p:33-50
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    1. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    2. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
    3. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
    4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
    5. repec:ner:tilbur:urn:nbn:nl:ui:12-3125520 is not listed on IDEAS
    6. Dailami, Mansoor & Atkin, Michael, 1990. "Stock markets in developing countries : key issues and a research agenda," Policy Research Working Paper Series 515, The World Bank.
    7. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    8. Peter L. Rousseau & Paul Wachtel, 1998. "Equity Markets and Growth: Cross-Country Evidence on Timing and Outcomes, 1980-1995," Working Papers 98-09, New York University, Leonard N. Stern School of Business, Department of Economics.
    9. Calderon Cesar Augusto & Chong Alberto & Loayza Norman V., 2002. "Determinants of Current Account Deficits in Developing Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-33, March.
    10. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    11. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
    12. 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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