Does financial development precede growth? Robinson and Lucas might be right
This paper studies whether there is any causal link between financial development indicators and economic growth, using Sims-Geweke causality tests performed in the large panel data set provided by Levine, Loayza and Beck. In sharp contrast to their findings, no evidence was found of any positive unidirectional causal link from financial development indicators to economic growth. On the contrary, a substantial indication that economic growth precedes subsequent financial development was found. As argued by Robinson, financial development might primarily follow economic growth, as a result of increased demand for financial services. Although the present result does not quite imply that the role of financial development in the development process is not important, the bottom line is that a more balanced approach to studying the relationship between growth and finance needs to be adopted. As termed by Lucas, the importance of financial development in economic growth might be very badly 'over-stressed'. Robinson and Lucas might be right.
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Volume (Year): 14 (2007)
Issue (Month): 1 ()
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- 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.
- 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.
- Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
- Blomström, Magnus & Lipsey, Robert E & Zejan, Mario, 1993.
"Is Fixed Investment the Key to Economic Growth?,"
CEPR Discussion Papers
870, C.E.P.R. Discussion Papers.
- Emilia Mazur & W. Robert & J. Alexander, 2001. "Financial sector development and economic growth in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 545-549.
- 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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