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Financial Deepening and Economic Growth in the European Transition Economies

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  • Mirdala, Rajmund

Abstract

Various effects of the financial deepening came to the centre of academics as well as policy-makers discussions during last four decades especially in relation to the financial sector development. Together with financial liberalization and international financial integration economists focus their attention to the financial deepening especially due to its potential effects on the real economy. Perspective of the fast and sustainable economic growth at the end of the 1990s increased an attractiveness of the European transition economies (ETE) for the foreign investors that resulted in increased foreign capital inflows to ETE. International capital inflows (especially debt and portfolio capital flows) stimulate financial deepening through higher demand for financial services. As the underdeveloped financial markets obviously constrain domestic capital mobilization, the international financial integration is considered to be very useful vehicle in fostering financial sector advancement. One of the most discussed areas related to the overall effects of the financial deepening is a bi-directional relationship between financial development and economic growth. It is generally expected there is a positive effect of financial development on economic growth. On the other hand especially some country-specific institutional characteristics and different policies may significantly distort positive incentives of the financial deepening. In the paper we analyze the main aspects of the financial deepening in ten ETE in the period 2000-2010 using vector error correction model (VECM). In order to meet this objective we implement a multivariate cointegration methodology introduced by Johansen (1988, 1991) and Johansen and Juselius (1990) to estimate the relationships between financial depth indicators and real output in the selected group of countries. To find the order of integration of endogenous variables we test the time series for the unit root presence. In order to determine cointegrating (long-run) relationships, we follow a Johansen cointegration procedure to perform the trace test and maximum eigenvalue test. We also test the direction of the causality relationships between financial depth indicators and real output using linear Granger causality test. Using the estimated VEC model, the dynamic responses of the endogenous variables to the money stock, domestic bank deposits and domestic bank loans one standard deviation shocks are computed for each country from the group of ETE.

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  • Mirdala, Rajmund, 2011. "Financial Deepening and Economic Growth in the European Transition Economies," MPRA Paper 33609, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33609
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    Cited by:

    1. Mirdala, Rajmund & Svrčeková, Aneta & Semančíková, Jozefína, 2015. "On the Relationship between Financial Integration, Financial Liberalization and Macroeconomic Volatility," MPRA Paper 66143, University Library of Munich, Germany.
    2. Mehmed Ganić & Mahir Hrnjić, 2021. "How Does International Financial Integration Really Affect Post-Transition Countries' Growth? Empirical evidence from the CEE-10 countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(3), pages 117-136.
    3. Evans, Olaniyi, 2016. "Determinants of Financial Inclusion in Africa: A Dynamic Panel Data Approach," MPRA Paper 81326, University Library of Munich, Germany.
    4. Mesut Alper GEZER, 2018. "The relationship between financial deepening and economic growth: Bootstrap causality approach for the selected upper middle income countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(614), S), pages 95-112, Spring.
    5. Rajmund Mirdala, 2011. "Financial Integration And Economic Growth In The European Transition Economies," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 2(2), pages 116-137.
    6. Evans, Olaniyi, 2015. "The Effects of Economic and Financial Development on Financial Inclusion in Africa," MPRA Paper 81325, University Library of Munich, Germany.

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    More about this item

    Keywords

    financial deepening; economic growth; vector error correction model; granger causality; impulse-response function;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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