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Financial development and economic growth: the case of Taiwan

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  • Tsangyao Chang
  • Steven Caudill

Abstract

This paper examines the relationship between financial development and economic growth in Taiwan from 1962 to 1998. Using a four-variable VAR model, the competing hypotheses of demand-following versus supply-leading are empirically tested. The results from Granger causality tests based on vector error-correction models (VECM) suggest unidirectional causality running from financial development (measured as the ratio of M2 to GDP) to economic growth. This result supports the supply-leading hypothesis for Taiwan. This finding highlights the importance of financial development in Taiwan's recent growth.

Suggested Citation

  • Tsangyao Chang & Steven Caudill, 2005. "Financial development and economic growth: the case of Taiwan," Applied Economics, Taylor & Francis Journals, vol. 37(12), pages 1329-1335.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:12:p:1329-1335
    DOI: 10.1080/0003684042000338702
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