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Does Financial Development 'Lead' Economic Growth?

  • Jordan Shan
  • Alan Morris
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    We use the Toda & Yamamoto (1995) causality testing procedure to investigate the relationship, if any, between financial development and economic growth.We use quarterly data from 19 OECD countries and China, and use total credit and interest spread as indicators of financial development. We also consider the impact of financial development on investment and productivity. We find meagre evidence that financial development 'leads' economic growth, either directly or indirectly. This casts further doubt on claims that financial development is a necessary and perhaps sufficient precursor to economic growth.

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    Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

    Volume (Year): 16 (2002)
    Issue (Month): 2 ()
    Pages: 153-168

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    Handle: RePEc:taf:irapec:v:16:y:2002:i:2:p:153-168
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    1. Blackburn, Keith & Hung, Victor T Y, 1998. "A Theory of Growth, Financial Development and Trade," Economica, London School of Economics and Political Science, vol. 65(257), pages 107-24, February.
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    3. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
    4. Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001) 96/16, Department of Economics, Keele University.
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    6. Zapata, Hector O. & Rambaldi, Alicia N., 1996. "Monte Carlo Evidence On Cointegration And Causation," Staff Papers 31690, Louisiana State University, Department of Agricultural Economics and Agribusiness.
    7. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    8. Demetriades, Panicos O & Luintel, Kul B, 1996. "Financial Development, Economic Growth and Banker Sector Controls: Evidence from India," Economic Journal, Royal Economic Society, vol. 106(435), pages 359-74, March.
    9. Demirguc-Kent, Asli & Detragiache, Enrica, 1998. "Financial liberalization and financial fragility," Policy Research Working Paper Series 1917, The World Bank.
    10. Shan, Jordan Z & Morris, Alan G & Sun, Fiona, 2001. "Financial Development and Economic Growth: An Egg-and-Chicken Problem?," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 443-54, August.
    11. 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.
    12. Ross Levine, 1998. "The legal environment, banks, and long-run economic growth," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 596-620.
    13. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    14. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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