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Financial Development and Income in Developing Countries

  • Mina Baliamoune-Lutz


This paper presents an empirical analysis of the controversial relationship between financial system development and economic development. Using cointegration and VAR estimations on annual data from Africa, we examine the nature of the relationship between financial development and income. We find mixed results on both the short and the long-run relationships between the two variables. We find finance causing income, income causing finance, and bi-directional causality. The results indicate that neither the short-run effects nor the long-run relationship seem to linearly depend on the level of financial development or the stage of development.

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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 09-2010.

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Length: 31 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:icr:wpicer:09-2010
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  1. Baliamoune-Lutz, Mina N., 2006. "Financial Reform and the Mobilization of Domestic Savings: The Experience of Morocco," Working Paper Series RP2006/100, World Institute for Development Economic Research (UNU-WIDER).
  2. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
  3. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  4. 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.
  5. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct.
  6. Stern, Nicholas, 1989. "The Economics of Development: A Survey," Economic Journal, Royal Economic Society, vol. 99(397), pages 597-685, September.
  7. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  8. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  9. Mina Baliamoune-Lutz, 2008. "Financial Development and Income in North Africa," International Advances in Economic Research, International Atlantic Economic Society, vol. 14(4), pages 422-432, November.
  10. Mina Baliamoune-Lutz, 2009. "Human Well-Being Effects Of Institutions And Social Capital," Contemporary Economic Policy, Western Economic Association International, vol. 27(1), pages 54-66, 01.
  11. Xu, Zhenhui, 2000. "Financial Development, Investment, and Economic Growth," Economic Inquiry, Western Economic Association International, vol. 38(2), pages 331-44, April.
  12. Mina Baliamoune-Lutz, 2005. "Institutions, Social Capital, and Economic Development in Africa: An Empirical Study," ICER Working Papers 18-2005, ICER - International Centre for Economic Research.
  13. George R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2011. "Finance and Income Inequality: What Do the Data Tell Us?," CEMA Working Papers 489, China Economics and Management Academy, Central University of Finance and Economics.
  14. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  15. Calderon, Cesar & Chong, Alberto & Galindo, Arturo, 2002. "Development and Efficiency of the Financial Sector and Links with Trust: Cross-Country Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 51(1), pages 189-204, October.
  16. Lütkepohl, Helmut & Saikkonen, Pentti & Trenkler, Carsten, 2000. "Maximum eigenvalue versus trace tests for the cointegrating rank of a VAR process," SFB 373 Discussion Papers 2000,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  17. Baliamoune-Lutz, Mina & Ndikumana, Léonce, 2007. "The Growth Effects of Openness to Trade and the Role of Institutions: New Evidence from African Countries," MPRA Paper 6189, University Library of Munich, Germany.
  18. repec:bla:restud:v:58:y:1991:i:2:p:195-209 is not listed on IDEAS
  19. Calderon, Cesar & Liu, Lin, 2003. "The direction of causality between financial development and economic growth," Journal of Development Economics, Elsevier, vol. 72(1), pages 321-334, October.
  20. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
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