Co-integration and Causality Analysis of the Financial Development on Urbanization

Abstract

This paper examines how financial development affects level of urbanization in China. Using a co-integration test and VEC model through time series data from 1991 to 2012, it is pointed that there is a long-term equilibrium relationship between the financial development and the level of urbanization. Furthermore, the research presents that the financial development scale has positive effect on the level of urbanization in short term, but the financial development structure and the financial development efficiency have negative effects on the level of urbanization in short term. The results suggest that in order to significantly promote the level of urbanization, current financial reform in China should enlarge the financial development scale, optimize financial structures, strengthen governance structure of state-owned bank and accelerate market-oriented reforms of interest rates. Keywords—financial development; urbanization; co-integration; VEC model; causality analysis