Evidence of Korea’s Finance-Growth Nexus: VARX Analysis with Financial Crisis and Openness

Korea’s finance-growth nexus is empirically investigated by taking the elements of financial crisis and openness―trade and financial―by employing the newly developed approach of vector error correction models with weakly exogenous I(1) variables (VARX). Considering financial development as a more complex phenomenon, we matter two aspects of financial deepening that are measured by its size (private credit to GDP) and efficiency (private credit to total domestic deposits). The main findings are: (1) financial efficiency contributes to accelerating economic growth; (2) the causality between economic growth and financial size is bilateral and negative; and (3) financial crisis is negative to both economic growth and financial development, whereas the growth-promoting effects of trade and financial openness are confirmed