Finance-growth Nexus Research Articles

A note on national leadership and technology in moderating finance-growth nexus

This paper seeks to determine the factors energising economic growth using balanced panel data between 1997 and 2017 from 44 developing economies. The heterogeneous panel data estimator, namely the pool mean group (PMG) estimator is utilised to analyse the data. We find national leadership, telecommunication technology and finance significantly impact growth. Additionally, the effects of finance and telecommunication on growth are both contingents upon exemplary leadership.

Monetary policy and bubbles in G7 economies using a panel VAR approach: Implications for sustainable development

We use the LPPLS Multi-Scale Confidence Indicator approach to detect both positive and negative bubbles in the short-, medium- and long-run for the stock markets of the G7 countries. We were able to detect major crashes and rallies in the seven stock markets over the monthly period of 1973:02 to 2020:09. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the G7 countries, suggesting synchronized extreme movements in these stock markets. Given this, to obtain an overall picture of the G7, we used a panel VAR model to analyze the impact of monetary policy shocks on the six indicators of bubbles. We found that monetary policy not only impacts the bubble indicators but also responds to them, with the nature of the underlying responses contingent on whether bubbles are positive or negative in nature, as well as the time-scale we are analyzing. In light of these findings, our results have serious implications for monetary authorities of these advanced markets in terms of sustainable development, given the finance-growth nexus. But in general, we can conclude that central banks of the G7 can indeed “lean against the wind”, and they have also been doing so under both conventional and unconventional monetary policy periods.

The Finance–Growth Nexus in Asia: A Meta-Analytic Approach

This paper features a meta-analysis of the effects of financial development and liberalization on macroeconomic growth in Asia. A meta-synthesis of 748 estimates extracted from 75 previous studies indicates that the growth-enhancing effect of finance reaches an economically meaningful scale in the region. Synthesis results also reveal that the finance–growth nexus in South Asia is stronger than that in East Asia. Publication selection bias is examined using both linear and nonlinear techniques, and our results show that there is a possibility of publication bias in the literature. After applying advanced and up-to-date meta-analysis methods, we find that the collected estimates contain significant underlying empirical evidence of the impact of finance on economic growth for both Asia and its subregions.

Revisiting the finance-growth nexus in Hong Kong: fresh insights from nonparametric analysis

PurposeSince financial sector plays a critical economic role in Hong Kong, the current research aims to comprehensively analyze the association between financial development and economic growth in the country to draw correct conclusions about the impact that financial sector's development has on the growth of the economy. This requires both using of more comprehensive data that includes all or nearly all elements of the country's financial sector and utilizing advanced econometrics techniques to provide more reliable evidence based on the findings. In the study, both issues have been addressed more academically to aid the relevant authorities better.Design/methodology/approachThis study empirically examines the financial development-economic growth nexus in Hong Kong employing data covering 1980–2019. The quantile-on-quantile (QQ) approach of Sim and Zhou (2015) is utilized to investigate certain subtle aspects of the association linking financial development and economic growth. In addition, the authors benefit from applying the nonlinear Granger causality test of Diks and Panchenko (2006) to assess the variables' nexus in a nonlinear manner.FindingsIn contrast to the evidence of a unidirectional linkage documented in many related studies, the empirical findings suggest that a bi-directional relationship exists between financial development and economic growth for Hong Kong. This is a helpful input for the relevant policymakers and implies that they can set appropriate policies and regulations to balance financial development and economic growth in this country.Originality/valueThe originality of this study can be divided into two parts. Methodologically, unlike past studies that utilized mostly linear and parametric methods, the paper contributes to the literature by applying the more robust nonparametric and nonlinear methodologies. Theoretically, most researchers have used various financial development indicators, which led to very different conclusions. Therefore, this study attempts to resolve this deficiency in the literature by using a more comprehensive index for financial development.

Examining Finance-Growth Nexus: Empirical Evidence From the Sub-Regional Economies of Africa

This paper examined finance-growth nexus in the finance industry and the influencing factors of economic indicators which deliberate on the performance of the Solow Growth model to prove the actuality of financial development (FD) inside the economic growth (EG) model, based on the regional data from 1980 to 2017 in Africa. We applied the econometric method of GMM style panel vector autoregressive (PVAR) and panel quantile regression (PQR). With the optimal finance-growth outcome, the review shows that the economic indicators influence the finance-growth nexus. The quantile results show that high economic indicators help to strengthen the finance-growth nexus, whereas low economic indicators hinder it. The GMM style PVAR results present a mixed effect in terms of the connection and marginal significance, indicating that FD has a varied impact on economic growth. Last, the granger causality results show a two-way causal association amid finance-growth in Western, Central, Eastern, and Southern African economies and a unidirectional causal link of finance-growth in Northern Africa. The policy conclusion is that to gain the long-term economic benefits of FD, African countries should strive for low and steady economic stability. To attain the required economic stability, it may be important to use suitable fiscal and monetary policies.

Accelerating Industrial Output Growth through Islamic Bank Decomposed Financing Optimization in Malaysia

Literature shows two hypothesis ‘More finance more growth’ formed u-shape and ‘too much finance’ formed an inverted u-shape profile. Existing literature shows contradicting findings on finance growth nexus by taking only a single indicator of total financing, where financial expansion is detrimental to growth if it surpasses a specific threshold point. This gap is addressed in this study by decomposing Islamic financing into Islamic producer financing (IPF) and Islamic consumer financing (ICF) and its quadratic impact on industrial output growth in Malaysia. Autoregressive Distributive lag (ARDL) approach is applied over the period of 2008; Q1 to 2020; Q4 and, in order to visualize the effect of moderator to the nonlinear model, this study have used Dawson (2014) approach. This study demonstrates a u-shaped relationship between Islamic decomposed financing and sectoral output growth, highlighting that financial development starts to accelerate the growth, once it surpassed the calculated threshold point. With the intention to determine the right financial ceiling to restrict financial activity, threshold points are crucial to the regulators. Our findings imply that policymakers should not only enhance financing, but also improve the quality of the financial system for potential growth. This necessitates the simultaneous expansion and tightening of financial rules, as well as the attendant supervision and surveillance of financial activities, in order to preserve the integrity of finance growth nexus and avoid the ‘vanishing effect’ which may lead to the incidence of future economic crises. This study enriches the discussion on Islamic decomposed financing and the threshold effect to contribute to the economic growth of the country.

Does proximity matter? The effect of financial sector development on economic growth in the EAC and SADC regional blocs

This study examines the finance-growth nexus among countries in the Southern African Development Community and East Africa Community regional blocs. We aim to see if small economies can rely on expansionary monetary policies to stimulate economic growth given the illusive nature of such policies. The panel error correction model is applied to analyze the aggregated data, which were obtained from the World Development Indicators and the Comité Européen d'Etudes des Polyphosphates. The results indicate that proximity to trading giants jeopardizes the freedom to use monetary expansionary policies among relatively small countries. If such policies are adopted, it will be a significant impact on countries located in regions where trading powers are evenly distributed.

Financial sector development, anti-money laundering regulations and economic growth

PurposeThis study examines the influence of anti-money laundering (AML) regulations on the financial development-economic growth nexus around the world.Design/methodology/approachThe study uses data from 165 countries spanning continents, income levels, and regulatory regimes from 2012 to 2018. The Prais–Winsten (1954) and Hansen (2000) panel threshold estimation approaches were used to assess the study's hypothesized relationships.FindingsFinancial development, according to the research, generally stimulates economic growth. However, the authors find evidence of AML regulations' threshold effect on the finance-growth connection, with the impact of finance on growth being positive below the threshold value. Above the threshold, however, the authors observe a negative influence. Further, the authors find that AML regulations have a considerable detrimental impact on the finance-growth nexus over the threshold for developed countries. However, the authors find a positive but insignificant effect of finance on growth below the AML regulations threshold for African countries, while finance positively impacts growth above the AML regulations threshold.Practical implicationsThe findings of the study imply that countries must make conscious efforts to combat the incidence of money laundering by establishing policies to improve financial transparency and standards, promoting public sector transparency and accountability, reducing legal and political risk, and combating bribery and corruption.Originality/valueThis study contributes to the literature as it is the first attempt to examine the moderating role of AML regulations in the finance-growth nexus. Also, the study examines the threshold effect of how AML regulations impact the finance-growth nexus.

The finance–growth nexus in the Middle East and Africa: A comparative meta‐analysis

AbstractBy taking 1417 estimates from 96 studies and applying advanced meta‐analysis techniques, this study compares the effect size of financial development (FD) and liberalization on economic growth in the Middle East and Africa. We find that the overall finance–growth nexus is positive, yet its effect size differs across regions. Indeed, finance has a larger growth‐enhancing effect in the sub‐Saharan Africa (SSA) region than in the Middle East and North Africa region. This finding is supported by meta‐regression analysis that controls for various study conditions simultaneously. Moreover, we uncovered that the extracted estimates contain evidence of the true effect size of FD and liberalization on growth in the extant literature and SSA studies.

Finance-Growth Nexus in Eastern and Southern African Countries: Insights from a Panel ARDL Analysis

This study analysed the finance-growth nexus for countries in the East African Community (EAC) and the Southern Africa Development Community (SADC). This was done an attempt to identify countries where Financial Sector Development (FSD) has the largest/least growth effect and the regional bloc moderation in such effect based on panel Error correction ARDL model. The aggregate data were obtained from the World Development Indicators (WDI) for a total of 14 countries, five (5) of which being in the EAC and the rest being in the SADC. The observations suggested that the regional bloc moderation effect transforms an otherwise insignificant effect of FSD on growth into a positive one specifically for broad money growth among the EAC member countries. This is a signal that a monetary union for EAC member countries could spur an overall welfare gain. Growth-finance nexus however, exhibited short and long run trade-offs in countries within the SADC. In the short run there have been significant GDP growth responses as a result of FSD but such effect turns out to be detrimental in the long run. As such difficult choices had to be made between addressing short run GDP volatility and achieving higher GDP growth in the SADC.

Understanding the Finance–Growth Nexus from a Multidimensional Perspective

This paper discusses the multidimensional nature of banking development and its effects on economic growth. Previous studies focused on the quantity dimension and overlooked other dimensions of banking development, which may have led to serious omitted variable bias in exploring the determinants of economic growth. However, incorporating other dimensions, such as banking efficiency, into growth models has proven to be a challenging task. More efforts are needed to construct indicators that can be used to proxy banking development in a more inclusive, precise, and consistent manner in future studies. JEL Codes: G21; O16; O47

Finance, growth and (macro)prudential policy: European evidence

This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of 12 euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.

Finance-Growth Nexus in the Framework of Democratic Construction: Empirical Evidence from Egypt

Finance-Growth Nexus in the Framework of Democratic Construction: Empirical Evidence from Egypt

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

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

The interrelationships among financial development, economic growth and environmental sustainability: evidence from Ghana.

A well established and developed financial system encourages savings and investment which stimulates economic growth. However, the link between financial development and the environment is ambiguous. In general, the role that the environment plays in the finance-growth nexus has received less attention, to the best of our knowledge. Against this backdrop, this study aims to examine the interrelationships among economic growth, financial development and carbon dioxide emissions for Ghana over the period of 1971-2018. To correct for a possible endogeneity problem, the three-stage least-square (3SLS) technique was employed. The results revealed that there is a bidirectional relationship between financial development and economic growth; and a unidirectional relationship from financial development to carbon dioxide emission. However, carbon dioxide emission has a neutral effect on economic growth and financial development. Economic growth exhibits an inverted U-shaped relationship with carbon dioxide emission, confirming the existence of the environmental Kuznets curve hypothesis in Ghana. Policymakers should consider the critical roles of financial development in achieving environmentally friendly growth in Ghana.

The Finance-Growth Nexus in Europe: A Comparative Meta-Analysis of Emerging Markets and Advanced Economies

ABSTRACT This paper performs a meta-analysis of the effect on economic growth of financial development and liberalization in European emerging markets and compares with that in European advanced economies. A meta-synthesis of 893 estimates extracted from 45 studies suggests that finance in emerging markets has a positive effect on growth. Furthermore, our findings indicate that the synthesized effect size in emerging markets was smaller than that in advanced economies. Results from meta-regression analysis and test for publication selection bias, however, show that some synthesis results cannot be reproduced when literature heterogeneity and publication selection bias are taken into consideration.

The finance-growth nexus in the age of financialisation: An empirical reassessment for the European Union countries

This paper draws an empirical reassessment of the finance-growth nexus by performing a panel data econometric analysis for all 28 European Union countries over 27 years from 1990 to 2016. Since the mid-1980s, the financial system has experienced a strong liberalisation and deregulation by preventing its beneficial effects on the real economy. This phenomenon, typically called financialisation, points to a negative view of finance and contradicts the well-entrenched hypothesis on the finance-growth nexus. We estimate both linear and non-linear growth models by incorporating seven proxies of finance (money supply, domestic credit, financial value added, short-term interest rate, long-term interest rate, stock market volume traded and stock market capitalisation) and five control variables (the lagged growth rate of the real per capita gross domestic product, the inflation rate, the general government consumption, the degree of trade openness and the education level of the population). Our results show that finance has impaired economic growth in the EU countries, both in the precrisis period and in the crisis and post-crisis periods. The enormous growth of domestic credit and of the financial value added have been restraining the economic growth of the EU countries since 1990 and particularly up until the Great Recession. This implies the need to reduce the prominence of finance, i.e. socalled definancialisation, in the coming years in order to avoid the potential new ?secular stagnation? in the current age of financialisation.

The finance-growth nexus in Latin America and the Caribbean: A meta-analytic perspective

This paper performs a meta-analysis of the effect of financial development and liberalization on macroeconomic growth in Latin America and the Caribbean using a total of 233 estimates collected from 21 previous works. Meta-synthesis of the collected estimates demonstrates that it is probable that financial development and liberalization enhance economic growth in the region, and these policy measures have the potential to have a meaningful impact on the real economy. The synthesis results also reveal that the choice of financial variables significantly affects reported estimates in the literature. Meta-regression analysis of literature heterogeneity and test for publication selection bias produce findings that are compatible with the synthesis results. The test results of publication selection bias also confirm that the existing literature contains genuine empirical evidence of the growth-promoting effect of finance in the region.

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

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

De-jure Financial Liberalization and Economic Growth: An Empirical Analysis

This paper investigated the finance-growth nexus by adopting a novel approach for Pakistan. Firstly, we constructed a financial liberalization index by incorporating several time-varying financial frictions and reforms which is a manifestation of the de-jure financial liberalization process. Secondly, for examining the impact of financial liberalization on growth, we extended the Solow-Swan growth model to construct a financial sector augmented growth model. By incorporating the de-jure financial liberalization index, we examined the growth-finance linkages. By employing the Auto-Regressive Distributive Lag model and error-correction mechanism, the results of the study showed that de-jure financial liberalization provides momentum to economic growth in the short-run as well as in the long run. Empirical findings highlighted that moving towards a more liberalized financial system by reducing rigidities and expediting an effective reform process offers very hopeful prospects of economic growth in developing countries like Pakistan. Keywords: Financial frictions, Financial Reforms, Economic growth, Principal Component Analysis, ARDL Model