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

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.