The Relationship Among Stock Markets, Banks, Economic Growth, and Industry Development

Abstract

Most previous studies examining the effect of financial and stock market development on economic growth did not consider the different levels of economic development, assuming that the effect is same at all stages of economic development. Thus, previous literature is unable to sufficiently explain the recent economic crisis caused by the excessive development of financial markets in developed economies. This study analyzes the effect of financial and stock market development on economic growth considering countries’ varying levels of development, using a dynamic panel generalized method of moments on a panel data for 94 countries from 1976 to 2005. The results show that for high-income countries, the effect of financial and stock market development on economic growth is negative. However, if such countries develop their financial markets with their manufacturing industries, the effect becomes positive. This study presents policy recommendations emphasizing the significance of combining financial development with real economic development.