Euro Zone Bond Market and Economic Growth: Evidence from a Time Series Analysis

Abstract

Purpose – The aim of this chapter is to analyze the relationship between the government bond market and real GDP growth for 16 euro zone countries. Methodology/approach – To this end, we apply a Granger causality/Vector Error Correction Model (VECM) over the period 2001–2011 using quarterly data. Findings – Our results support evidence for (i) the supply-leading channel for five euro zone economies: Portugal, Finland, Italy, Greece, and France; (ii) the demand-leading channel for Greece and Slovenia; and (iii) the interdependence channel only for Greece. Originality/value of chapter – This chapter contributes to the burgeoning literature from three empirical and methodological points of view. First, there is a deep scarcity of empirical researches on causality relationship between financial development through bond market extension and economic growth in the specific case of euro zone using different econometric methods and this chapter tries to fill this gap. Second, the chapter studies the linkages between bond markets and real sector for a larger sample of European Union (EU) countries (16 euro zone economies) and for a more recent time horizon, which takes into account also the recent financial crisis (2001–2011). Third, this chapter show that there is a causality from growth to finance in the case of Greece and Slovenia, while the reverse case, the supply-leading assumption, is supported only for Portugal, Finland, Italy, Greece, and France.