IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Financial Development and Economic Growth: Evidence from Heterogeneous Panel Data of Low Income Countries

  • Qayyum, Abdul
  • Siddiqui, Rehana
  • Hanif, Muhammad Nadim

This paper examines empirical relationship between financial development and economic growth while incorporating the inflation rate effect on financial development for low income countries. The study focuses on both the indirect finance and the direct finance, separately as well as collectively. We apply most appropriate econometric methodology of Weinhold (1999) and Nair-Reichert and Weinhold (2001) for causality analysis in heterogeneous panel data. Two sets of results are reported. First, the relationship between financial development and economic growth from contemporaneous non-dynamic fixed effects panel estimation can at best be interpreted as mixed. Negative and statistically significant estimates of coefficient of the inflation and financial development interaction variable indicate that financial sector development is actually harmful for economic growth when inflation is rising. Second, in contrast with the recent evidence of Beck and Levine (2003), use of more appropriate econometric methodology of dynamic heterogeneous panel for causality analysis and a refined model reveal that there is no definite indication that finance spurs economic growth or growth spurs finance. Our findings are in line with the Lucas (1988) view on finance that the importance of financial matters is very badly over-stressed in popular and even much professional discussion.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/23431/1/MPRA_paper_23431.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23431.

as
in new window

Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:pra:mprapa:23431
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  2. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  3. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  4. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
  5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  6. repec:fth:wobaco:1083 is not listed on IDEAS
  7. Khan, Mohsin S. & Senhadji, Abdelhak S. & Smith, Bruce D., 2006. "Inflation And Financial Depth," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 165-182, April.
  8. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633, March.
  9. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  10. Jose De Gregorio & Federico Sturzenegger, 1994. "Financial Markets and Inflation Under Imperfect Information," IMF Working Papers 94/63, International Monetary Fund.
  11. Diana Weinhold, 2004. "A Dynamic “Fixed Effects” Model for Heterogeneous Panel Data," Econometrics 0410003, EconWPA.
  12. A. R. Kemal, 2000. "Financing Economic Development," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 293-311.
  13. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
  14. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  15. Sangmok Choi & Bruce D. Smith & John H. Boyd, 1996. "Inflation, financial markets and capital formation," Review, Federal Reserve Bank of St. Louis, issue May, pages 9-35.
  16. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
  17. Hsiao, Cheng & Mountain, Dean C. & Chan, M. W. Luke & Tsui, Kai Y., 1989. "Modeling Ontario regional electricity system demand using a mixed fixed and random coefficients approach," Regional Science and Urban Economics, Elsevier, vol. 19(4), pages 565-587, December.
  18. Arellano, M, 1987. "Computing Robust Standard Errors for Within-Groups Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(4), pages 431-34, November.
  19. Nair-Reichert, Usha & Weinhold, Diana, 2001. " Causality Tests for Cross-Country Panels: A New Look at FDI and Economic Growth in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 153-71, May.
  20. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2001. "Legal Theories of Financial Development," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 483-501.
  21. Thorsten Beck & Ross Levine, 2002. "Stock Markets, Banks, and Growth: Panel Evidence," NBER Working Papers 9082, National Bureau of Economic Research, Inc.
  22. Jose De Gregorio & Federico Sturzenegger, 1994. "Credit Markets and the Welfare Costs of Inflation," NBER Working Papers 4873, National Bureau of Economic Research, Inc.
  23. van den Berg, Hendrik, 1997. "The relationship between international trade and economic growth in Mexico," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 1-21.
  24. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  25. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, vol. 14(4), pages 395-426, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:23431. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.