Abstract
This paper investigates the relationship between financial markets and output growth for a panel of 27 Asian countries over 1960-2009. It utilizes the recently-developed panel cointegration techniques to test and estimate the long-run equilibrium relationship between real GDP and financial development proxies. Real GDP and financial development variables are found to have unit roots and to be cointegrated, based on various panel unit root tests and panel cointegration tests. We find that there is a statistically significant positive bi-directional cointegrating relationship between financial development and output growth by three distinct methods of panel cointegration estimation. Empirical findings suggest that financial market development promotes output growth and in turn output growth stimulates further financial development.
Highlights
To date, various research results have been reported on the relationship between financial market development and economic growth
3 types of panel cointegration estimation techniques - canonical cointegrating regression (CCR), dynamic ordinary least squares (DOLS), and fully-modified ordinary least squares (FMOLS) - are utilized to estimate the output-finance regression equation. This estimation is performed in both directions with the dependent and independent variables interchanged to find evidence for the existence of a bi-directional relationship between output growth and financial development
3 types of panel cointegration estimation techniques - CCR, DOLS, and FMOLS - are utilized to estimate the output-finance regression equation
Summary
Various research results have been reported on the relationship between financial market development and economic growth. Despite the accumulation of research output, there has been no satisfactory consensus in theoretical or empirical aspects. There are models proposing that financial development promotes economic growth such as Levine (1991), Chakraborty and Ray (2006), and Deidda and Fattouh (2006), while there are models suggesting that economic growth causes financial development, i.e. reverse causation as in Robinson c Korea Institute for International Economic Policy (1952), and Greenwood and Smith (1997) among others. An argument that financial development promotes economic growth - Beck and Levine (2004), McCaig and Stengos (2005) - , an assertion that economic growth causes financial development - Ang and McKibbin (2007), Liang and Teng (2006) - , a claim that there could be a bi-directional causality - Luintel and Khan (1999), etc. An argument that financial development promotes economic growth - Beck and Levine (2004), McCaig and Stengos (2005) - , an assertion that economic growth causes financial development - Ang and McKibbin (2007), Liang and Teng (2006) - , a claim that there could be a bi-directional causality - Luintel and Khan (1999), etc. - , and a view that there is no significant relationship between finance and growth - Naceur and Ghazouani (2006) - coexist in the current literature of empirical studies
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