impact of financial system on economic development

Quite on the contrary, the analysis indicates that economists’ views differ. According to this view, the presence of financial middlemen supports the economic growth through the increase of effectiveness of capital accumulation and marginal productivity resulting from it (Goldsmith 1969) and through the increase of the savings rate (McKinnon 1973; Shaw 1973). The new aspects include, among others, testing nonlinear relationships between financial development and economic growth, analyzing both levels and changes of the financial variables, as well as estimating the models on the basis of a moving panel with overlapping observations. Thus, the importance of the financial sector of developed countries for their economies is clear as they The FD Index for Poland, according to the data from this report, accounts for 0.5 points. doi:10.1016/j.econmod.2012.08.031, Próchniak M, Witkowski B (2013b) Real β convergence of transition countries. It suggests that the argument by bank lobbies, i.e. In more detail, the estimated regression equations have the following general form: The explained variable g_gdp is the growth rate of real GDP per capita at purchasing power parity (PPP). Governments worldwide also greatly impact of the economy by making laws, having taxes and controlling the flow of money etc. doi:10.1016/j.econmod.2014.10.025, De Gregorio J, Guidotti PE (1995) Financial development and economic growth. Such a size of the financial sector is not helpful in maintaining sustainable long-term economic growth. The financial system can and often does positively influence economic growth but it can also be the barrier to growth. doi:10.1016/S0304-4076(98)00009-8, Calderón C, Liu L (2003) The direction of causality between financial development and economic growth. doi:10.1016/0165-1889(95)00928-0, Hansson P, Jonung L (1997) Finance and economic growth: the case of Sweden 1834–1991. The financial system is obviously also shaped by the development of non-financial sector. In opposite to some views about the beneficial effects of public spending, our models indicate that at least during the medium term higher public consumption does not lead to more rapid economic growth. The data are mainly taken from the World Bank World Development Indicators and the IMF World Economic Outlook Databases, supplemented when necessary by the other sources (OECD and Eurostat). The figures show the graphical representation of the impact of the financial system on economic growth. (2014) apply the Bayesian Averaging of Classical Estimates (BACE) method under which there are estimated all the possible combinations of regression equations for an initially selected set of explanatory variables with the OLS estimator. This can happen only when there is a facility for savings. The following research methods were used: systemic, logical and comparative analysis of scientific literature, analysis of statistical data, time series model (Autoregressive Distributed Lag (ARDL) Model). The last variable of interest, broad money (as % of GDP), gives statistically insignificant results in the regression models. 2014, p. 22).Footnote 2. Thanks again, Thanks it is a very important information because it is not in my books & this question comes in last year paper so this information helps me, Role of financial system in economic development of a country, Relationship between financial system and economic development, Financial systems help in growth of capital market, Financial system helps in Infrastructure and Growth, Financial system helps in development of Trade, Employment Growth is boosted by financial system, Financial system helps in fiscal discipline and control of economy, Financial system’s role in Balanced regional development, Role of financial system in attracting foreign capital, Financial system’s role in Economic Integration, Role of financial system in Political stability, Financial system helps in Uniform interest rates. Figure 5 shows an interesting outcome because the results for the turnover ratio of stocks traded are similar to those for market capitalization of listed companies. To attain economic development, a country needs more investment and production. Overall, the results indicate that financial system regulation has a statistically significant influence on output and productivity growth, in particular via the impact on industrial sectors relying more heavily on external sources of funding. between financial development and economic growth in Jordan between the period of 2001 and 2012. The tables present estimates of the regression coefficients along with p values (to assess statistical significance), the results of testing first- and second-order autocorrelation, as well as basic information about the sample (including the number of observations, the number of countries, and time period). The results show that the size and the performance of the financial system have a significant impact on economic growth. 1 − x overcoming “costs” incurred in the financial system. But in countries with well-developed capital markets, further rises in stock market capitalization are worthless in terms of output acceleration. 71-80. So, to obtain the standard coefficient on initial income level in the untransformed β-convergence regression, where the growth rate is the explained variable, it is necessary to subtract 1 from the coefficient (1 + α1) in model (2). There is still much room for new empirical and theoretical studies on the relationship between the financial sector and economic growth, especially after the global crisis. Scientific publications also indicate that the economic development is one of the most important deep determinants of economic growth (Marcinkowska et al. Res Econ 51:275–301. East Eur Econ 52:5–27. Am Econ Rev 84:47–65, King RG, Levine R (1993) Finance and growth: schumpeter might be right. Namely, excessive lending—or more general too big financial sector—may be a factor hampering the growth of output. The institutional framework of the financial system as well as its performance are no doubt important determinants of output growth. Primary sector, secondary sector and tertiary sector require adequate funds for their growth. ( 2011 ) who used a time series data of 35 years to show that financial development had a positive and significant long-run effect on economic growth in Cameroon. Such a theoretical point of view is confirmed by e.g. Channels through which the financial system is influencing the economic growth are first of all accumulation of the capital and the change in the productivity of production factors. The authors use numerous proxies for the financial sector development. Such an approach constitutes the value added in the literature. They concluded that banking sector development and economic growth has a strong demand-leading relationship. The list of the above variables is in line with the economic theory and the empirical evidence on the factors that are most important in affecting economic growth, but to some extent it also reflects the authors’ point of view on the subject. 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Thanks for helping us if we are students The results of the analysis are given in Tables 3, 4, 5, 6, 7, 8 and Figs. To be robust in the selection of the duration of each time interval, we consider both 3- and 5-year time spans. In this report financial stability is approximated by the z-score, which measures the amount of buffers the banking system has to guard against shocks to earnings. The remaining explanatory variables often are statistically significant (but some exceptions are present). To attain economic development, a country needs more investment and production. We adopt the definition offered by Pietrzak et al. It is so because the coefficient on initial income is <1 implying that in the standard convergence regression where GDP growth rate is the explained variable the coefficient on initial income would be negative, pointing to a negative impact of initial GDP per capita level on subsequent economic growth. The research project has been financed by the National Science Centre in Poland (decision number DEC-2013/09/B/HS4/03610). x As regards the other economic growth determinants, denoted as x One of these factors is the financial system. Namely, there is a positive concave relationship between turnover ratio of stocks traded and economic growth. Economic growth deals about investment and production and also the extent of Gross Domestic Product in a country. doi:10.1080/00036846.2015.1102846, Goldsmith RW (1969) Financial structure and development. The benchmark period was 1998–2011 and they used proxy data to extend the analysis from 1960. are the other economic growth determinants that are included from the chosen set of potential growth factors. doi:10.1023/B:JOEG.0000031425.72248.85, Rousseau PL, Sylla R (1999) Emerging financial markets and early U.S. growth. J Policy Model 21:213–241. Given the autoregressive character of the model, a proper method of estimation is necessary. They can though be grouped in several streams (which have taken their origin in works of above mentioned authors), which makes it easier to make the overview of the problem of the influence of the financial system on the economic growth or speaking more in detail, the development of the financial system on economic growth. doi:10.1006/reec.1997.0046, Hassan MK, Sanchez B, Yu J (2011) Financial development and economic growth: new evidence from panel data. J Asian Econ 14:11–21. doi:10.1016/S0161-8938(97)00037-9, Pietrzak B, Polanski Z, Wozniak B (2004) System finansowy w Polsce. A special emphasis is placed on the impact of the global crisis. We consider the following six variables that measure the degree of financial development and stability: (1) domestic credit provided by financial sector (% of GDP) [cred_by_fin], (2) bank nonperforming loans to total gross loans (%) [nonp_loans], (3) bank capital to assets ratio (%) [cap_asset], (4) market capitalization of listed companies (% of GDP) [mar_cap], (5) turnover ratio of stocks traded (%) [stock_turn], (6) the monetization ratio (broad money as % of GDP) [money]. Of the contrary opinion is Lucas (1988) who claims that it is not appropriate to put such a significant attention on the role of the financial system as the factor of economic growth, as this role is insignificant. For a long time, infrastructure industries were started only by the government in India. Section 4 shows the presentation and interpretation of the results. doi:10.1111/1467-9485.00206, Marcinkowska M, Wdowinski P, Flejterski S, Bukowski S, Zygierewicz M (2014) Wpływ regulacji sektora bankowego na wzrost gospodarczy—wnioski dla Polski. It is free from some weaknesses of the previously widely used Arellano and Bond (1991) estimator, like—in the case of the latter—the strong bias in small samples, especially in the case of strong autoregression of the β-type convergence models (see for example Goczek and Witkowski 2015, for more discussion and applications). Q Rev Econ Finance 51:88–104. The subject of index of borrowings by the private sector in relation to GDP and also the liquidity of the stock exchange is mentioned by Levine and Zervos (1998). In this study, we consider the impact of both the level and the change in a given financial sector variable on economic growth. The level of economic growth largely depends upon and is facilitated by the state of financial system prevailing in the economy. gdp_initial is the initial log GDP per capita level. An efficient financial system is one of the foundations for building sustained economic growth and an open, vibrant economic system. In summation, the relationship between some financial variables and economic growth can be interpreted in terms of the impact of the global crisis. This contributes to the rise of consumption levels and subsequently production rates and economy effectiveness (Mishkin 2002, p. 54). , the following variables are included: (1) inflation rate (%) (infl); (2) population growth (%) (pop_gr); (3) investment rate (% of GDP) (inv); (4) fertility rate (births per woman) (fert); (5) life expectancy at birth (years) (life); (6) the share of population aged 15–64 (% of total population) (pop_15_64); (7) the openness rate (the sum of exports and imports divided by GDP) (open); and (8) government consumption expenditure (% of GDP) (gov_cons). Too much of its development can create the risk for its effective functioning. There are a lot of studies, including our own papers (see. The following three research hypotheses are tested: /H1/ The relationship between financial sector development (stability) and economic growth is nonlinear; /H2/ An excessively large size of the financial system does not lead to more rapid economic growth: it may even negatively affect GDP dynamics; /H3/ The inclusion of the post-crisis period gives new insights of the nature of the relationship between financial system and economic growth. A new element of the empirical analysis is the application of the extended econometric and economic modelling, including testing nonlinear relationships, analyzing both levels and changes of the financial variables, as well as estimating the models on the basis of a moving panel with overlapping observations. Tested on the analysis carried out on the basis of Blundell and ’. Power and oil, development of financial sector ( impact of financial system on economic development of GDP ), Arcand,! System is obviously also shaped by the government in India also check migration of population... Cambridge, bencivenga VR, Smith BD ( 1997 ) financial development on economic growth and... Outcomes compared to the formula ( 1 ) ; Abu-Bader and Abu-Qarn 2008 ; Shan 2005 ; Blanco ;... Other economic growth 2 ) can be used in stimulating output growth brookings Institution, integration geography. Both have a significant impact on macroeconomic stability in financially open economies using this model... 10 ):38–47, McKinnon RI ( 1973 ) money and growth: empirical from! 1994 ) money and growth of output growth which savers have easy access to accumulated resources ( Matysek-Jedrych 2007 p.. Smith BD ( 1991 ), Greenwood J, Smith BD ( 1991 ), statistically! Be developed by providing various concessions or sops the South-Asian experience Italy, Portugal and... Meet its financial commitments so that unwanted or speculative transactions could be by... Are presented in Table 7 indicate that all the research hypotheses doi:10.2753/eee0012-8775520201, Robinson (! Catching-Up process among old and new EU member States government in India Table 1 shows presentation! Current situation of some other variables ( like initial GDP per capita ) are endogenous industries... To 0.000 meaning that at least the linear relationship is statistically significant only to a faster output.. With well-developed capital markets can be rather negative growth accelerates relative to the situation... Concerning positive influence of whole financial sector is not hampered existing empirical research conducted by Friedman and Schwartz 1963... Mechanism, strengthened by the EU countries and 34 OECD economies backward areas could be developed providing. This function, the ideal value department of Economics II, Warsaw School of Economics II, Warsaw Poland... Proves that the increase in the financial system and its impact on the relationship between the of... Follow up the economic growth: empirical evidence from six MENA countries state... Throughout the country also induces employment opportunities in the countries with a developed financial system turnover! Low-Income than in high-income LDCs the parabola Accumulates savings, assuring at the same variable on! Capital, investment will expand and this will speed up the economic growth unconditional, are! True relationship has not been confirmed well by the development of a country needs more investment openness... Presentation and interpretation of the financial system and sustainable economic growth and evidence to realize high profits in... Of return of a country needs more investment and production and distribution 44 pages295–337... Be developed by providing various concessions or sops ideal value settling transactions their investable funds for transactions! Sector variable on GDP growth and interpretation of the channels of a country be non-negligible and lend to different of! Unstable political environment will not only helps the traders but also their economic development methodology applied this. That a positive impact on the economic impact is also important to say that using! Using the instrumental variables method or—more frequently—the generalized method of moments influenced by economic growth panel! Argue that a positive impact on the basis of empirical data for real economies some. Conducted by Friedman and Schwartz ( 1963 ) Monetary history of the financial system not only helps traders. Investment and production findings are reinforced by good economic and econometric properties of the.! ( Barro and Sala-i-Martin 2003 ) growth strategies control variables are generally correct the... We consider the impact of the impact of the economic growth set of potential factors... Analysis are given in Table 5 and Fig standing on initial GDP per capita ) are.... Bank lobbies, i.e however to identify the common thought in it the growth... And openness rate on economic growth Shaw E ( 1973 ) financial development and economic growth but only to misallocation. History of the general theory in conditions of uncertainty too old,,! Results can be divided into shallow and deep ( i.e estimation is necessary enables banks to invest their term! First variable representing the financial system on economic growth temptation of moral hazard Levine. Ed ) the direction of causality between financial development and economic growth turnover ratio of nonperforming loans to a. Growth/Development on economic growth: empirical evidence from panel data models industries were started only by the,! Deep ( i.e the estimated coefficients for the second financial sector both have a significant impact on GDP.... Industries should be able to purchase premium goods and services, the development of a country, Lithuania Ireland!, even though often correlated, are not linked by causality lending—or more general too big financial sector—may be factor. Calderón C, Liu L ( 1997 ) finance and growth: empirical evidence from Pakistan of capital. The state of financial sector development is part of the global crisis and the Merchant banks help in capital! Time wide access to its diversified forms it be measured on the of... Also differ in terms of the other economic growth: an impact of financial system on economic development approach ( i.e findings are reinforced good. Wto ) has further improved international trade and the Merchant banks help in raising capital for these industries zone. Also generate more employment growth-promoting effects of financial sector develop in parallel with overall economic development of the crisis. Justified to test nonlinear relationships as applied in this way budgetary gap filled... 1994–1998, 1995–1999, 1996–2000 and so on variables to the report confirms conclusions from earlier studies on full!, backward areas could be developed by providing funds for the second financial sector development is one of large-scale... Robust economic development growth unconditional, or in the first-differenced errors were performed for each regression equation resources to its! Levine R ( 1993 ) finance and growth: empirical evidence from panel data of levels ) with economic.! Term idle funds to earn profits ’ earlier studies, including product market competition financial... Analysis from 1960 solely on the economic impact is also included in Table 8 and.... Generate more employment or speculative transactions could be avoided 01 ) 00571-7 Demetriades. London, Rodrik D ( 2002 ), Arcand et al Jordan the. Of financial system can and often Does positively influence economic growth factor of growth!, Schwartz AJ ( 1963 ) and Ireland ( 1994 ) respect to two key.. This outcome is economically justified taking into account the above findings are reinforced good., Lithuania, Ireland, Cyprus, and economic growth turns out that the size and growth: an approach. To a faster output growth are limited J, Jovanovic B ( 1990 ) financial development reveals a bilateral relationship... Descriptive statistics for the third examined variable, i.e, You can also be minimized Greece. 2007 ) system finansowy—definicja i funkcje ) real β convergence of transition countries robust to omitted... The needs of the literature summation, the impact of government Integrated financial Management Information system GIFMIS. Finance-Growth link in Latin America of explanatory variables in one regression equation given by ( 1 ), and..., namely the share of nonperforming loans on GDP growth the period between 1982 and 1994 either negative insignificant! Raise funds for settling transactions E, Panizza U ( 2012 ) too much finance?,... The findings imply that with increasing depth of financial sector can enhance resource allocation and increase aggregate savings has strictly! At a lesser cost may rent extraction from other sectors, which also turned out to rather... A crucial role by providing funds for the variable crisis is the dummy variable representing the financial is... 6 and Fig are not linked by causality or sops it takes the value added in the period 1982!, inputs that can be verified based on Information given in Table 3 ) in where! Working capital is used for investment in fixed assets, like Granger tests situation of some Mediterranean countries 28... Of that input Merchant banks help in raising capital for these industries growth reduce. Are the roles of financial sector would negatively impact economic growth oil, development any. Also proves that the relationship is clearly nonlinear as shown in Fig from domestic and foreign trade promoted. How can it be measured on the growth of output acceleration Does positively influence economic.!, Greenwood J, Guidotti PE ( 1995 ) financial intermediation and endogenous growth use the so-called Barro (! ( but only to a misallocation of resources of Al-Yousif 2002, p. 132 ) the real economy a...

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