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Finance-Growth-Crisis Nexus in Asian Emerging Economies: Evidence from VECM and ARDL Assessment

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  • Takashi Fukuda

    () (3-35-13 Kengun, Kimamoto-shi, Kumamoto-ken 862-0911, Japan)

  • Jauhari Dahalan

    () (College of Business, UniversitiUtara Malaysia, 06010 UUM Sintok, Kedah, Malaysia)

Abstract

This paper examines the causal relationship between financial development, economic growth and financial crisis in the five Asian emerging economies (India, Indonesia, South Korea, Malaysia and Thailand) during the period 1982 to 2007. All of these countries are known as emerging economies with well known financial crisis episodes (i.e., India's 1991 crisis and the Asian 1997 crisis). The summary indicators of financial development, financial crisis and financial repression are constructed through the principal component approach. The cointegration and Granger causality analysis are conducted by using two techniques of vector error correction model (VECM) and autoregressive distributed lag (ARDL). The main findings are: (1) the direction of the finance-growth nexus is country-specific; (2) deeper financial development can lead to financial crisis; and (3) financial crisis has a negative impact on economic growth (except Korea for the last two). On policy implication, we ascertain that the growth effect of financial deepening should be appraised with the view that financial deepening could gravitate toward financial crisis.

Suggested Citation

  • Takashi Fukuda & Jauhari Dahalan, 2012. "Finance-Growth-Crisis Nexus in Asian Emerging Economies: Evidence from VECM and ARDL Assessment," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 5(2), pages 69-100, August.
  • Handle: RePEc:tei:journl:v:5:y:2012:i:2:p:69-100
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    References listed on IDEAS

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    1. Panicos O. Demetriades & Kul B. Luintel, 1997. "The Direct Costs Of Financial Repression: Evidence From India," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 311-320, May.
    2. Konstantinos Kassimatis & Spyros Spyrou, 2001. "Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 33(8), pages 1057-1064.
    3. Arestis, Philip & Demetriades, Panicos O & Luintel, Kul B, 2001. "Financial Development and Economic Growth: The Role of Stock Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 16-41, February.
    4. Rousseau, Peter L. & Vuthipadadorn, Dadanee, 2005. "Finance, investment, and growth: Time series evidence from 10 Asian economies," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 87-106, March.
    5. 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.
    6. Fase, M. M. G. & Abma, R. C. N., 2003. "Financial environment and economic growth in selected Asian countries," Journal of Asian Economics, Elsevier, vol. 14(1), pages 11-21, February.
    7. Yang, Yung Y. & Yi, Myung Hoon, 2008. "Does financial development cause economic growth? Implication for policy in Korea," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 827-840.
    8. James Crotty, 2009. "Structural causes of the global financial crisis: a critical assessment of the 'new financial architecture'," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 563-580, July.
    9. Prabir Bhattacharya & M. N. Sivasubramanian, 2003. "Financial development and economic growth in India: 1970-1971 to 1998-1999," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 925-929.
    10. Ang, James B. & McKibbin, Warwick J., 2007. "Financial liberalization, financial sector development and growth: Evidence from Malaysia," Journal of Development Economics, Elsevier, vol. 84(1), pages 215-233, September.
    11. Luintel, Kul B. & Khan, Mosahid, 1999. "A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR," Journal of Development Economics, Elsevier, vol. 60(2), pages 381-405, December.
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    Cited by:

    1. Suela Kristo, 2013. "Efficiency of the Albanian banking system: Traditional approach and Stochastic Frontier Analysis," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 6(3), pages 61-78, December.
    2. Vasiliki Makri & Konstantinos Papadatos, 2014. "How accounting information and macroeconomic environment determine credit risk? Evidence from Greece," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 7(1), pages 129-143, April.
    3. repec:prg:jnlpep:v:2017:y:2017:i:3:id:615:p:300-316 is not listed on IDEAS

    More about this item

    Keywords

    Finance-growth nexus; financial crisis; Asia; VECM; ARDL;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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