Abstract
Purpose The purpose of this paper is to examine the relationship between financial development and economic growth for five major emerging economies: Brazil, Russia, India, China and South (BRICS) during 1993 to 2014 using banking sector and stock market development indicators. Design/methodology/approach To begin with, the study first examined some of the principal indicators of financial development and macroeconomic variables of the selected economies. Next, using generalized method of moment system estimation (SYS-GMM), the relationship between financial development and growth is investigated. The banking sector development indicators used in the study include size of the financial intermediaries, credit to deposit ratio (CDR) and domestic credit to private sector (CPS), whereas the stock market development indicators are value of shares traded and turnover ratio. Also, some macroeconomic control variables such as inflation, exports and the enrolment in secondary education were used. Findings The examination of the principal indicators of financial development and macroeconomic variables have shown considerable differences between the selected economies. Results from the dynamic one-step SYS-GMM estimates confirm that in presence of turnover ratio, all the selected banking development indicators such as size of financial intermediaries, CDR and CPS are positively significantly determining economic growth. Similarly, in presence of all the selected banking sector development indicators, value of shares traded is found to be positively significantly associated with economic growth. However, the same is not true when turnover ratio is regressed in presence of banking sector variables. Overall, the evidence suggests that banking sector development and stock market development indicators are complementary to each other in stimulating economic growth. Practical implications A positive association between financial development and growth indicates that the policymakers should take necessary measures toward simultaneous development of both banking sector as well as stock market for inducing growth. Originality/value The present paper attempts to examine the relationship between financial development and growth using both banking sector and stock market development indicators which has not been attempted before for BRICS. Also, most of the existing studies are found in case of developed economies. This paper tries to fill this void by studying five major emerging economies.
Highlights
Development of an economy requires its financial sector to be developed
Summary and conclusion First to begin, the paper examined some of the principal indicators of financial development and macroeconomic variables for a panel of selected economies (BRICS)
The paper investigated the relationship between financial development and economic growth for the panel of BRICS using SYS-generalized method of moments (GMM) by employing financial development indicators both from banking sector and stock market during 1993 to 2014
Summary
Development of an economy requires its financial sector to be developed. The development of financial sector happens in the process of founding and growth of institutions, instruments and markets that sustain the huge investments and growth which help in reducing poverty. Financial development gives better information about possible profitable investments and promotes optimum allocation of capital. The expanding financial access inculcates dynamic efficiency in the system by bringing about a structural change through innovation and welfare gain to the entire economy. A well-developed financial market channelizes the savings of an economy to profitable investments (Stiglitz and Weiss, 1983; Diamond, 1984), reduce information cost thereby leading to better capital allocation (Greenwood and Jovanovic, 1990) and reduce the cost of corporate governance (Bencivenga and Smith, 1993). According to Levine (1997), financial systems assist in trading, diversification, hedging and risk amelioration, apart from facilitating transactions of goods and services
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