Is natural resource abundance a stimulus for financial development in the USA?

Abstract

This paper investigates the stimulating role of natural resource abundance in financial development for the case of the USA over the period of 1960–2016. We included education, economic growth and capitalization as additional determinants of financial development in finance demand function. Thus, we applied traditional and recent unit root tests, accommodating unknown structural breaks in the series for examining the unit root properties of the variables. To examine cointegration between the variables, we apply the Bayer-Hanck cointegration approach. The robustness of cointegration relationship is tested by applying the bounds testing approach to cointegration. The empirical results show the presence of cointegration between financial development and its determinants. In the long run, we observe that natural resource abundance contributes to financial development. Education has a positive impact on financial development. A positive relationship exists between economic growth and financial development. Capitalization is inversely linked with financial development. The causality analysis reveals a feedback effect between natural resource abundance and financial development i.e. natural resource abundance causes financial development; in turn, financial development Granger causes natural resource abundance. This empirical evidence provides new insights for policy makers to use natural resource abundance as an economic tool to improve the performance of financial sector by considering the role of economic growth and education.