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

Author

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

Abstract

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.

Suggested Citation

  • Qayyum, Abdul & Siddiqui, Rehana & Hanif, Muhammad Nadim, 2004. "Financial Development and Economic Growth: Evidence from Heterogeneous Panel Data of Low Income Countries," MPRA Paper 23431, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:23431
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    References listed on IDEAS

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    4. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
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    7. De Gregorio, Jose & Sturzenegger, Federico, 1997. "Financial markets and inflation under imperfect information," Journal of Development Economics, Elsevier, pages 149-168.
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    Cited by:

    1. Muhammad Zia Ullah Khan & Muhammad Illyas & Muqqadas Rahman & Chaudhary Abdul Rahman, 2015. "Money Monetization and Economic Growth in Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(4), pages 184-192, April.
    2. Muhammad Zia Ullah Khan & Chaudhary Abdul Rahman, 2015. "Money, Monetization and Economic Growth in Pakistan," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(3), pages 95-104, March.
    3. repec:sos:sosjrn:170302 is not listed on IDEAS
    4. V. U. Duc Cong & Kihwan Lee & V. U. Hoang Long, 2016. "An Empirical Analysis of the Prominent Roles of Taxations in the Synchronicity on Boost of Maritime Industry in Singapore," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 118-131.
    5. Selim Yildirim & Bilge Kagan Özdemir & Burhan Dogan, 2013. "Financial Development and Economic Growth Nexus in Emerging European Economies: New Evidence from Asymmetric Causality," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 710-722.

    More about this item

    Keywords

    Financial Development; Inflation; Economic Growth; Low Income Countries;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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