Financial Market Development and Economic Growth. New or Old Nexus in the Euro Area?

Sławomir I. Bukowski, Łukasz J. Zięba

Abstract


The problems of the nexus of financial development, financial market development, and economic growth have so far been controversial. Some authors have questioned the linearity of that nexus or the general idea of nexus. In recent literature devoted to those problems, authors emphasise the changes in the link between financial development and economic growth. The consequences of financialization and the last financial crisis have become the premises for a new hypothesis concerning the nonlinearity of the financial development and economic growth nexus. Some authors indicate that this nexus probably has the shape of inverted letter U. When financialization measured by the relation of financial assets to GDP reaches too high a level, the impact of financial development on economic growth will be negative (after reaching the inflection point on the U curve). There are a number of arguments that indicate that the use of quadratic terms leads to statistical illusions, which are connected with specific mathematical and statistical features of the quadratic function form. Therefore, the authors have implemented the traditional method of the dynamic panel data model, which is unbalanced (because some of the data is not available).
The aim of our research is to answer the question: does the nexus of financial market development and economic growth exist?
Thus our hypothesis is as follows: financial market development influences economic growth in the euro area in an economically and statistically significant way.
We investigate this phenomenon based on the euro area countries and implemented panel data models (unbalanced), and use annual data concerning main financial market development and macroeconomic control variables.


Keywords


financial development, economic growth, financial market, dynamic panel model

Full Text:

PDF

References


Arcand, J. L., Berkes, E. & Panizza, U. (2012) “Too Much Finance?”. IMF Working Paper 161.

Beck, T. and Levine, R. (2001) “Stock Markets, Banks and Growth. Correlation or Causality?”. The World Bank Policy Research Working Paper 2670.

Beck, T. and Levine, R. (2004) “Stock Markets, Banks and Growth: Panel Evidence”. Journal of Banking and Finance 28(3), https://doi.org/10.1016/S0378-4266(02)00408-9.

Bukowski, S. I. (2009) “Development of Financial Markets and Economic Growth: Case of Poland, Greece, Italy, Ireland” in J. L. Bednarczyk, S. I. Bukowski, G. A. Olszewska (eds) Eseje z polityki gospodarczej i rynków finansowych. Radom: Wydawnictwo Politechniki Radomskiej.

Bukowski, S. I. (2010) “Development of Financial Markets and Economic Growth: Case of Poland and Ireland”. Acta Universitatis Lodziensis. Folia Oeconomica 241.

Bukowski, S. I. (2012) “Rozwój rynków finansowych a wzrost gospodarczy w obszarze Euro-12”. Acta Universitatis Lodziensis. Folia Oeconomica 268.

Bukowski, S. I. (2013) Integracja rynków finansowych w Unii Europejskiej. Czechy, Polska, Słowacja, Słowenia, Węgry – obszar euro. Radom: Spatium.

Caporale, G. M., Howells, P. G. A. and Soliman, A. M. (2004) “Stock Market Development and Economic Growth: The Casual Linkage”. Journal of Economic Development 29(1).

Caporale, G. M., Howells, P. G. A. and Soliman, A. M. (2005) “Endogenous Growth Models and Stock Market Development: Evidence from Four Countries”. Review of Development Economics 9(2), https://doi.org/10.1111/j.1467-9361.2005.00270.x.

Cappiello, L., Lo Duca, M. and Maddaloni, A. (2008) “Country and Industry Equity Risk Premia in the Euro Area. An Intertemporal Approach”. ECB Working Paper Series 913.

Carré, E. and L’œillet, G. (2018) “The Literature on the Finance-Growth Nexus in the Aftermath of the Financial Crisis: A Review of Comparative Economic Studies”. Journal of the Association for Comparative Economic Studies 60(1), https://doi.org/10.1057/s41294-018-0056-6.

Cline, W. (2015) “Too Much Finance, or Statistical Illusion?”. Peterson Institute for International Economics. Policy Brief 15–9.

Doumbia, D. (2016) “Financial Development and Economic Growth in 43 Advanced and Developing Economies over the Period 1975–2009: Evidence of Non-linearity”. Applied Econometrics and International Development 1: 13–22.

Eschenbach, F., and Francois, J. F. (2005) “Finance and Growth: A Synthesis of Trade and Investment Related Transmission Mechanisms”, http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.114.8518&rep=rep1&type=pdf (accessed: 12 July 2018).

Goldsmith, R. W. (1969) Financial Structure and Development, New Haven, Yale University Press, retrieved from: Beck, T. and Demigurc-Kunt, A., Levine, R., Maksimovic, V. (2000) Financial Structure and Economic Development: Firm, Industry and Country Evidence. The World Bank, pp. 2–3.

Guiso, L., Jappelli, T., Padula, M. and Pagano, M. (2004) “Financial Market Integration and Economic Growth in the EU”. Center for Studies in Economics and Finance [CESEF] Working Paper 118.

Gurgul, H. and Lach, Ł. (2012) “Financial Development and Economic Growth in Poland in Transition: Causality Analysis”. Czech Journal of Economics and Finance 62(4).

Kendall, J. (2012) “Local Financial Development and Growth”. Journal of Banking & Finance 36(5): 1548–1562, https://doi.org/10.1016/j.jbankfin.2012.01.001.

King, R. G. and Levine, R. (1993) “Finance and Growth: Schumpeter Might be Right”. The World Bank Working Paper 108(3), https://doi.org/10.2307/2118406.

Levine, R. (2004) “Finance and Growth: Theory and Evidence”. NBER Working Paper 10766, https://doi.org/10.3386/w10766.

Levine, R. and Zervos, S. (1996) “Stock Market Development and Long-run Growth”. The World Bank Policy Research Working 1582.

Levine, R. and Zervos, S. (1998) “Stock Markets, Banks and Economic Growth”. The American Economic Review 88(3).

Levine, R., Loayza, N. and Beck, T. (2000) “Financial Intermediation and Growth: Causality and Causes”. Journal of Monetary Economics 46(1), https://doi.org/10.1016/s0304-3932(00)00017-9.

Lucas Jr, R. E. (1988) “On the Mechanics Of Economic Development”. Journal of Monetary Economics 22.

Masten, A. B., Coricelli, F. and Masten, I. (2008) “Non-linear Growth Effects of Financial Development: Does Financial Integration Matter?”. Journal of International Money and Finance 27(2), https://doi.org/10.1016/j.jimonfin.2007.12.009.

Miller, M. H. (1998) “Financial Markets and Economic Growth”. Journal of Applied Corporate Finance 11(3).

Próchniak, M. and Wasiak, K. (2016) “Zależność między rozwojem i stabilnością sektora finansowego a tempem wzrostu gospodarczego w krajach Unii Europejskiej ze szczególnym uwzględnieniem państw Europy Środkowo-Wschodniej”. Rocznik Instytutu Europy Środkowo-Wschodniej 14(5).

Roubini, N. and Sala-i-Martin, X. (1992) “Financial Repression and Economic Growth”. Journal of Development Economics 39(1).

Rousseau, P. L. and Wachtel, P. (2000) “Equity Markets and Growth: Cross-country Evidence on Timing and Outcomes, 1980–1995”. Journal of Banking and Finance 24(12), https://doi.org/10.1016/s0378-4266(99)00123-5.

Rousseau, P. L. and Wachtel, P. (2002) “Inflation Thresholds and the Finance-Growth Nexus”. Journal of International Money and Finance 21(6), https://doi.org/10.1016/s0261-5606(02)00022-0.

Schumpeter, J. (1960) Teoria wzrostu gospodarczego. Warszawa: PWN.

Von Pischke, J. D. (1991) Finance at the Frontier. Debt Capacity and the Role of Credit in the Private Economy. Economic Development Institute of The World Bank, The World Bank No. 9788.




DOI: https://doi.org/10.15678/AOC.2019.2103