Abstract
ABSTRACT This paper conducts a time series econometric analysis in order to examine empirically the relationship between the financial system and economic growth in Portugal from 1977 to 2016. The Portuguese financial system has experienced a strong wave of privatisations, liberalisations and deregulations since the adhesion of Portugal to the European Economic Community in 1986, which has not favoured a sustained path of strong economic growth since then. The paper estimates a linear growth model and a non-linear growth model, which includes four proxies for the financial system (money supply, credit, financial value added and stock market capitalisation) and four further control variables (inflation, government consumption, trade openness and education). The paper finds a negative linear relationship between the banking system and Portuguese economic growth, a positive linear relationship between the stock markets and Portuguese economic growth, a concave quadratic relationship between the banking system and Portuguese economic growth, and a convex quadratic relationship between the stock markets and Portuguese economic growth. This suggests that Portuguese policy makers should canalise efforts to decrease the importance of banking system and to increase the importance of stock markets in order to support more robust economic growth in the coming years.
Highlights
In 1986, Portugal joined the European Economic Community, which imposed the need to adopt a set of measures in order to achieve a higher development of the financial system
The Portuguese financial system has experienced a strong wave of privatisations, liberalisations and deregulations since the adhesion of Portugal to the European Economic Community in 1986, which has not favoured a sustained path of strong economic growth since
We can confirm that the linear growth models with the proxies of money supply and stock market capitalisation and the non-linear growth model with the proxy of credit do not suffer from any econometric problems
Summary
In 1986, Portugal joined the European Economic Community, which imposed the need to adopt a set of measures in order to achieve a higher development of the financial system. The growth of the financial system is at the root of the last financial and economic crisis in Portugal, the so-called sovereign debt crisis (Barradas et al, 2018) This process, typically referred as financialisation, emphasises a negative view of the financial system, casting doubts on the traditional hypothesis of the finance-growth nexus. These doubts have been fed by several empirical works that have concluded that there has been a weaning or even a reversal in the relationship between the financial system and economic growth (Rioja and Valev, 2004a and 2004b; Aghion et al, 2005; Kose et al, 2006; Prasad et al, 2007; Rousseau and Wachtel, 2011, Cecchetti and Kharroubi, 2012; Barajas et al, 2013; DablaNorris and Srivisal, 2013; Beck et al, 2014; Breintenlechner et al, 2015; Ehigiamusoe and Lean, 2018; Alexiou et al, 2018)
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