Finance-growth Nexus Research Articles

Examining the impact of government spending on the finance-growth nexus: evidence from post-communist economies

ABSTRACT This study examines the impact of government spending on the finance-growth nexus in 27 post-communist economies from 1995 to 2017 using dynamic panel estimators. Many transitional economies have attempted to reduce the influence of government intervention during their early transitional period while reforming their respective financial sectors. The findings show that overall financial development is positive to growth, while government spending has a negative impact on growth. More importantly, the marginal effects of financial development are positive to growth at low levels of government spending. In contrast, at high levels of government spending, financial development has a negative relationship to growth. Focusing on different aspects of financial development, the findings show that financial access and efficiency are more effective at stimulating growth compared to financial depth. Post-communist economies should ensure that government spending should not crowd out the financial sector, and promote financial efficiency and accessibility.

The Role of Institutional Quality in Finance-Growth Nexus: Evidence from North African Countries

The Role of Institutional Quality in Finance-Growth Nexus: Evidence from North African Countries

Finance-Growth Nexus in Bangladesh: Is it Important to Quantify Financial Development?

This study aims to examine empirically whether financial development can promote economic growth in Bangladesh. It employs the Autoregressive Distributed Lag (ARDL) model and takes annual data from 1987 to 2019. This study confirms a cointegrating relationship between financial development and economic growth. The nature of this relationship is unidirectional, running from financial development to economic growth. The outcome of the study confirms that financial development, as proxied by private sector loans and broad money supply, augments economic growth in the long-run. As for the control variables, gross domestic savings show an insignificant impact on economic growth when private sector loans are proxied for financial development. However, it confirms a substantial impact on economic growth when broad money supply is proxied for financial development. More interestingly, trade openness, another control variable, suggests an adverse impact on economic growth in the long-run. However, it has a substantial positive influence on economic growth in the short-run. In the short-run, broad money supply at lag 2 and gross domestic savings significantly affect economic growth when broad money supply is proxied for financial development. The findings of this study advocate that a robust and dynamic financial structure in Bangladesh is a critical success factor for developing the country's economic growth.

Trivariate Modelling of the Nexus Between Financial Development, Globalization and Economic Growth: Insight from African Countries

Financial development has been identified as main drivers of economic growth. However, empirical probe of this nexus remains inconclusiveness due use of an inappropriate proxy by previous studies, and the inability of previous studies to consider globalization in this nexus. To this end, we probe the finance-growth nexus in the presence of globalization by applying the Pooled Mean Group (PMG) estimator to a sample of 21 countries spanning 1990–2017. The empirical results affirm the supply-leading hypothesis which indicates that financial development spur economic growth. In addition, our estimate provides evidence of a positive linear relationship between globalization and economic growth. Further, results indicate that physical capital investment plays an important role in accelerating economic performance of African economies. Based on these findings, it is important for African countries to promote globalization-financial development policies in order to have access to alternative sources of external financing and attract foreign investment that can spur growth of African countries.

Investigation for Finance–Growth Nexus: A Dynamic Common Correlated Estimator Approach

The study investigated the impact of financial development in bringing the economic well-being, using the data of 10 selected developing countries, as a sample for the period from 1991 to 2017. However, the study utilizes the regression of group mean dynamic common correlated estimator (DCCE) by Chudik and Pesaran (2015) to analyse the said circumstance. For estimation, the present study is considering the major tycoons of financial development and their relevant areas that are significantly effecting the economic growth. However, the broad money (GAM1), domestic credit to private sector to GDP (GAM2), domestic credit to private sector by banks (GAM3), government’s final consumption expenditures (GAFCE) and foreign direct investment GAFC are major contributors in attaining the GDP per capita (GADA). However, the estimation of the concerned circumstance was also evaluated in terms of shorter and longer run estimations. The results of the short– and long–run estimations also authenticate the results of DCCE estimations. The robustness of the results is verified with the help of Pedroni (2004) test, fully modified ordinary least squares (FMOLS) test by Pedroni (2001) and dynamic ordinary least squares (DOLS) by Stock and Watson (1993) . The robustness tests also verify the factors that are considered as the major players of financial development for uplifting the concerned economies. Selected developing countries have the potential for utilizing their financial development options to manage their growth at the economic level. For practical implications and for policymaking, the ingredients of this particular study can be endorsed to get the desired results.

Finance-led growth hypothesis for Asia: an insight from new data

The quest for the development of financial system has been the major concern of the Asian economies over the years. Using a System Generalized Methods of Moments technique for 44 Asian countries over the period 1980–2017, we evaluate the effect of financial development on economic growth for the entire Asia, sub-regions and groups of the countries by their levels of income. Additionally, we considered the subcomponents of the financial system. The contribution of this study hinges on the use of a comprehensive measure of financial development, and consideration of the heterogeneity of the Asian countries concerning the finance-growth nexus. The findings revealed that financial development spurs economic growth in Asia. Specifically, the development of financial institutions have a greater impact than development of financial markets on growth of upper-middle and high-income countries while the reverse is the case for low and low-middle income countries in the continent.

Islamic Financial Depth, Financial Intermediation, and Sustainable Economic Growth: ARDL Approach

The pre-eminence of Islamic finance from the perspective of economic growth has been a long-standing debate. In recent decades, there has been a paradigm shift from interest-based banking to Islamic financial system. This study intends to examine the dynamic interaction of Islamic financial depth (IFD), Islamic financial intermediation (IFI), and asset quality with economic growth in a dual banking system. The paper employs autoregressive distributive lag regression (ARDL), error correction model (ECM) and Granger causality to examine the long and short run linkage by using the quarterly data of Pakistan from 2005 to 2019. The authors run two models to analyze the relative importance of financial depths (Islamic and conventional), financial intermediation (Islamic and conventional), and asset quality of both financial systems. A long-run relationship flowing from finance to growth in both Islamic and conventional finance models has been observed in our study. Furthermore, the findings recommend that strong financial intermediation plays an imperative role in driving economic growth by both financial sectors. The presence of a higher degree of Islamic financial assets in the economy contributes towards economic growth in the short-run. The results show that asset quality possibly plays an important intervening role in the overall finance-growth nexus.

Financial access and the finance–growth nexus: evidence from developing economies

PurposeThis study examines the impact of financial institutions access and financial institutions depth on economic growth in 51 low- and lower–middle-income countries from 1996 to 2017.Design/methodology/approachThe study employs an index of financial institutions depth and financial institutions access that considers the multidimensional nature of finance. The study employs a generalised least squares model as the baseline fixed effects model suffers from serial correlation. In addition, the study examines the marginal impact of financial development on growth at varying levels of financial access.FindingsThe results show that both financial access and financial depth are positive to growth. However, the marginal impact of financial depth is negative at low levels of financial access, while the finance–growth relationship becomes positive at higher levels of financial access. Results suggest the importance of developing inclusive financial systems that emphasise quality rather than quantity to promote economic growth.Research limitations/implicationsThe major limitation lies in the measurement of financial access as it focusses more on financial system penetration and overlooks the other aspects of financial inclusion such as financial literacy and cultural differences.Practical implicationsDeveloping countries should continue to develop an inclusive financial system that supports the Universal Financial Access 2020 initiative.Originality/valueThis study provides further empirical evidence on the finance–growth literature focussing on the impact of financial inclusion which is scarce. Furthermore, the study employs an index of finance that captures the multidimensional nature of finance.

Finance-growth nexus in sub-Saharan Africa

Background: There is now significant empirical literature suggesting that finance is good for growth only up to a threshold level of financial development, becoming harmful after that level, in developed and developing countries. Aim: This study extends this literature that investigates non-linearities on the finance-growth link, by testing the inverted U -shape hypothesis in sub-Saharan African countries, which are among the least developed ones. Setting: 36 countries from sub-Saharan Africa over the period 1980–2015. Method: Estimation of quadratic dynamic panel data models by system-generalised method of moments. Results: Empirical results show that there is a hump-shaped relationship between financial development and economic growth in sub-Saharan African countries. Conclusion: Results suggest that the hypothesis of ‘too much finance harms economic growth’ also holds for low-income and less developed countries, but for much lower threshold levels of financial development than those of more developed and higher-income countries. As for policy implications, measures to strengthen finance quality and other growth-enhancing strategies need to be undertaken, rather than increasing finance size.

On the transmission mechanisms in the finance–growth nexus in Southern African countries: Does institution matter?

On the transmission mechanisms in the finance–growth nexus in Southern African countries: Does institution matter?

Finance and economic growth nexus: evidence from Gansu province in China

This study investigates the association between financial development and economic growth in the long run using the time series data from 1985 to 2018 in financially undeveloped Gansu province in China. Regarding methodology, this paper employs ADF unit root test, Johansen co-integration test, VECM and Granger causality test to analyze the long-term relationship. The outcomes signal that the variables of financial depth, financial efficiency and economic growth are co-integrated, and the level of total financial development is negatively correlated with economic growth while financial efficiency is positively associated with output growth. In addition, there is a two-way causation between each pair of variables.

The real impact of ratings-based capital rules on the finance-growth nexus

We investigate whether ratings-based capital regulation has affected the finance-growth nexus via a foreign credit channel. Using quarterly data on short to medium term real GDP growth and cross-border bank lending flows from G-10 countries to 67 recipient countries, we find that since the implementation of Basel 2 capital rules, risk weight reductions mapped to sovereign credit rating upgrades have stimulated short-term economic growth in investment grade recipients but hampered growth in non-investment grade recipients. The impact of these rating upgrades is strongest in the first year and then reverses from the third year and onwards. On the other hand, there is a consistent and lasting negative impact of risk weight increases due to rating downgrades across all recipient countries. The adverse effects of ratings-based capital regulation on foreign bank credit supply and economic growth are compounded in countries with more corruption and less competitive banking sectors and are attenuated with greater political stability.

Electrification, telecommunications, and the finance-growth nexus: Evidence from firm-level data

We explore variations in access to energy and telecommunications improvements across firms in 57 and 112 developing countries, respectively, between 2002 and 2014, and find that national investments in technological infrastructures provide a channel through which financial development promotes firm-level adoption of tangible innovations. In particular, when countries make large investments in their energy (electricity and natural gas) and telecommunications infrastructures, firms with greater access to financial resources are better positioned to benefit from these investments, experiencing significantly fewer power interruptions, more adoptions of power generators, and greater website use, all of which are related to higher firm-level growth in sales and employment. • Infrastructure investments operate through financial development to affect firm growth. • Firms with financial access leverage energy infrastructure to see fewer energy interruptions. • Firms with financial access leverage telecom investments to see more website usage. • Results derive from data for as many as 112 developing countries.

The finance-growth nexus: The role of banks

We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, type of credit, and bank type matter in economic growth. We use a unique dataset covering 5555 cities in Brazil, with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector is associated with municipal economic growth more strongly than earmarked credit, despite the increase in the relevance of the latter after the global financial crisis. We also find that the type of credit—whether the loans are general purpose or for a specific purpose—is associated with economic growth in different ways. Overall, credit provided to the corporate sector by domestic private banks is correlated with higher economic growth rates. In contrast, the relationship between credit from state-owned banks and economic growth becomes statistically significant only after the crisis. Although we follow the finance-growth literature in our empirical exercises using internal instruments in generalized method of moments (GMM) estimations, we also conduct robustness tests using two additional external instruments: the number of complaints filed against each bank and local credit accessibility. Our findings with external instruments are the same with respect to the use of traditional internal instruments in GMM estimations.

Finance-growth nexus and banking efficiency: The impact of microfinance institutions

This paper investigates the relative importance of microfinance institutions (MFIs) at both the macro (financial development, economic growth, income inequality, and poverty) and micro levels (efficiency of traditional commercial banks). We observe a significant impact on most of the fronts. MFIs’ participation increases overall savings (total bank deposits) and credit allocation (loans to private sector) in the economy. Their involvement enhances economic welfare by reducing income inequality and poverty. Additionally, their active presence helps to discipline the traditional commercial banks by subjecting them to more competition triggering higher efficiency.

Financial Development and Economic Growth in Uganda: A Multivariate Causal Linkage

ABSTRACT In this study, we have explored the dynamic causal relationship between financial development and economic growth in Uganda during the period from 1980 to 2015. Although the finance-growth nexus debate has been raging for decades, Uganda, similar to many other low-income sub-Saharan African countries, has not yet received adequate coverage on the subject. To eliminate the variable omission bias associated with some previous studies, two intermittent variables, namely savings and inflation, have been included alongside financial development and economic growth in a multivariate Granger-causality setting. In addition, five proxies of financial sector development have been used in the current study, namely money supply to GDP, deposit money bank assets as a percentage of bank assets, liquid liabilities to GDP, private credit by deposit money banks to GDP, and bank deposits to GDP. Using the ARDL approach, the findings of the study reveal that the direction of causality between financial development and economic growth in Uganda is not clear-cut. It varies from one model to the other, depending on the proxy used for financial development. When financial development is proxied by liquid liabilities to GDP and bank deposits to GDP, a unidirectional causal flow from financial development to economic growth is found to prevail. When deposit money bank assets to bank assets ratio is considered a proxy of financial development, astrong bi-directional causal relationship between financial development and economic growth is found to predominate. However, when money supply to GDP and private credit by deposit money banks to GDP are used as proxies, no causality is found to exist between financial development and economic growth in either direction. Based on these results, it is recommended that when drafting policies aimed at boosting economic growth, policymakers should target growth-led financial development proxies as policy implementation outcomes may vary depending on the targeted financial development proxy.

Financial systems, regulatory quality, and economic growth

This study examined symmetric and asymmetric causal relationships among financial systems, regulatory quality, and economic performance in selected African countries. The patterns of causality and impulse responses were found to vary across the selected countries, and the following were confirmed: symmetric demand-following, symmetric supply-leading, symmetric feedback, and neutrality hypotheses. Also confirmed were negative and positive demand-following hypotheses, negative and positive supply-leading hypotheses, and negative and positive feedback hypotheses. Overall, our recommendation is that in cases where supply-leading hypothesis is confirmed, policy target should be financial development so as to either stimulate economic growth or prevent economic decline, whereas in cases where demand-following hypothesis is confirmed, emphasis should be placed on growth-enhancing policies in order to either achieve financial development or prevent crisis in the financial system. We also argue that the quality of regulation plays an important role in the finance-growth nexus as it has a mediating effect on both the real and financial sectors. We further argue that it is important to consider asymmetric dynamics when testing causality in finance-growth relationships. It is possible that the economy (financial system) would react differently to changes in financial system (economy), depending on whether the changes are positive or negative.

The Effect of Financial Sector Development on Economic Growth of Selected Sub-Saharan African Countries

Finance-growth nexus is among the main debatable issue in economics and policymaking. So, this research tried to look at the effect of financial sector development on the economic growth of 25 sub-Saharan Africa countries by using panel data for time 2010-2017. Precisely, three dynamic panel data models which look the effect of financial sector depth, access and efficiency on economic growth were estimated by two-step system GMM estimation. In this research, credit extended to the private sector per GDP, commercial bank branch per 100,000 adult population, and Return to assets were used as a proxy for financial sector depth, access, and efficiency, respectively. Accordingly, the results revealed financial sector depth, access, and efficiency have a positive and statistically significant effect on the economic growth of these countries. It is therefore recommended for the concerned bodies that broadening the depth of financial institutions by giving more credit for the private sector is essential. Besides, the financial institutions will have to be expanded to increase their accessibility to the mass and have to take some measures which promote their efficiency.

Inflation and Finance-Growth Nexus in Sub-Saharan Africa

ABSTRACT The study aims at determining the effect of inflation on finance-growth nexus on 23 Sub-Saharan Africa countries with 5-year averaged data set over the period 1982–2016. A non-dynamic threshold approach is utilized. Strong evidence of inflation threshold of 31% beyond which the impact of financial development on economic growth turns negative from positive is obtained. There is also inflation threshold of 13% obtained when financial development is represented by private credit by deposit money banks and other financial institutions (% of GDP) but with an even higher positive impact of financial development on economic growth beyond the identified inflation threshold. This supports the view that financial development can only become inversely related to growth at much higher-inflation level of above 31%, below which there is robust positive finance-growth nexus. It is, therefore, recommended to always keep inflation levels at lower levels, preferably below 31%, which would ensure sustainable development through financial development.

Who wins and who loses from bank geographic deregulation? Analysis of financially constrained and unconstrained firms

A key issue in the finance-growth nexus literature is endogeneity – economic growth may drive finance as well as finance driving growth. Some research addresses endogeneity using relatively exogenous shocks from U.S. bank geographic deregulation, often documenting favorable economic effects. We connect deregulation shocks for the first time to individual firm growth in a model that differentiates sources of external financing – short-term debt, long-term debt, and equity. Our results suggest that deregulation increases firm growth overall and this growth is fueled by all three external funding sources. However, benefits accrue only to relatively financially unconstrained firms, while relatively constrained firms lose.