Unveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe

Abstract

There have been major reforms of the financial system within Europe over the past two decades. These reforms were initiated to enhance the competitiveness and sustainable economic growth of economies in this region. This paper investigates the inter-relationships between the reforms undertaken in the financial sector (banking sector, stock market, and insurance industries) and economic growth in Europe. More specifically, this study examines whether there are Granger causal relationships between banking competition, stock-market development, insurance market development, and economic growth, using a panel dataset covering European countries over the period from 1996 to 2016. Utilizing a multivariate framework, the study's results show that all the variables are cointegrated. The findings reveal a network of Granger causal associates between the variables, including short-run bidirectional causality between stock market development and insurance market development. In the long run, there is compelling evidence of Granger causality from banking competition, insurance market development, and stock market development to economic growth. The results provide valuable insights into the types of financial sector reforms that will enhance sustainable economic growth in Europe.