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Economic Growth and Finance. A cointegration analysis in US and Japan

  • Giuseppina Testa

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    This paper aims at investigating the relationship between financial and economic development for two countries: the US and Japan. A great deal of theoretical and empirical studies showed the existence of a close relation between the development of the financial sector and economic growth (Greenwood and Jovanovic, 1990, Bencivenga and Smith, 1991, King and Levine, 1993, Levine et al., 2000); nevertheless many concerns still remain: it is, for instance, unclear how the development of financial markets drives economic growth and, more relevant, whether it causes or is caused by economic growth. Moreover, previous empirical studies showed that time series and cross sectional approaches lead to different results. In this paper, the long-run relationship among finance and growth is investigated through the cointegration analysis (an estimation method developed over the last decade). The cointegration analysis can help to shed light on the aforementioned issues: it helps both to examine the interactions between the variables under consideration (real GDP per capita, private credit, investment share and inflation), taking into account the non stationarity of the data, and to capture the existence of potential cointegrating links between series (being explicit a priori about their form). With this regard, the aim of our analysis is twofold: 1) to investigate whether it is possible to find a stable relationship between financial development and real GDP per capita; 2) to investigate the possible channels of transmission from financial intermediation sector to economic growth.

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    File URL: http://www.dsems.unifg.it/q2205.pdf
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    Paper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 22-2005.

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    Date of creation: Nov 2005
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    Handle: RePEc:ufg:qdsems:22-2005
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    1. Johansen, S., 1991. "Testing Weak Exogeneity and the Order of Cointegration in UK Money Demand Data," Papers 78, Helsinki - Department of Economics.
    2. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
    3. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    4. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    5. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    6. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
    7. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    8. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    9. Levine, Ross & Zervos, Sara, 1996. "Stock market development and long-run growth," Policy Research Working Paper Series 1582, The World Bank.
    10. Barro, R.J. & Mankiw, N.G. & Sala-i-Martin, X., 1992. "Capital Mobility in Neoclassical Models of Growth," Papers 655, Yale - Economic Growth Center.
    11. 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.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    13. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
    14. 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.
    15. Katarina Juselius & David F. Hendry, 2000. "Explaining Cointegration Analysis: Part II," Discussion Papers 00-20, University of Copenhagen. Department of Economics.
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    20. Behrman, J.R. & Ross, D. & Sabot, R. & Alderman, H., 1995. "The Returns to endogenous Human Capital in Pakistan's Rural Wage Labour Market," Center for Development Economics 141, Department of Economics, Williams College.
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    22. Delano Villanueva & Mohsin S. Khan, 1991. "Macroeconomic Policies and Long-Term Growth; A Conceptual and Empirical Review," IMF Working Papers 91/28, International Monetary Fund.
    23. Dornbusch, Rudiger, 1990. "Policies to Move from Stabilization to Growth," CEPR Discussion Papers 456, C.E.P.R. Discussion Papers.
    24. Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001) 96/16, Department of Economics, Keele University.
    25. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    26. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
    27. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    28. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    29. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
    30. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
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