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The impact of financial development on income convergence: An application of two exogenous growth models

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  • Ranjbar, Omid
  • Rassekh, Farhad

Abstract

The literature has established that financial institutions and financial markets have a significant impact on economic growth. The present paper seeks to determine whether they increase the speed of convergence towards the steady-state income. If so, then financial development is a convergence factor in addition to being a growth factor. To carry out our study, we employ the growth model of Ramsey-Cass-Koopman as well as that of Diamond. The RCK model predicts financial development positively affects the speed of convergence while the Diamond model predicts only a level effect. Our empirical analysis supports the prediction of the RCK model.

Suggested Citation

  • Ranjbar, Omid & Rassekh, Farhad, 2017. "The impact of financial development on income convergence: An application of two exogenous growth models," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 65-74.
    • Handle: RePEc:eee:reveco:v:50:y:2017:i:c:p:65-74
    DOI: 10.1016/j.iref.2017.03.028
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    References listed on IDEAS

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    3. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    4. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    5. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    8. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    9. David Cass, 1965. "Optimum Growth in an Aggregative Model of Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(3), pages 233-240.
    10. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
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    Cited by:

    1. Hülya Saygılı & K. Azim Özdemir, 2021. "Regional economic growth in Turkey: the effects of physical, social and financial infrastructure investment," Empirical Economics, Springer, vol. 60(4), pages 2039-2061, April.
    2. Neagu Olimpia & Porumbăcean Teodora & Anghelina Andrei Marius, 2023. "Does Financial Development, Globalisation and Institutional Quality Drive the Income Convergence in the Central and Eastern European Union Countries?," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 33(1), pages 88-108, March.
    3. Samargandi, Nahla & Kutan, Ali M. & Sohag, Kazi & Alqahtani, Faisal, 2020. "Equity market and money supply spillovers and economic growth in BRICS economies: A global vector autoregressive approach," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Jiang-Ze, Bian & Qi-Lin, Qin & Xiao-Yi-Jing, Chen & Xia-Jun, Wu, 2024. "Stock markets, local governments leverage, and regional economic development: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

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    More about this item

    Keywords

    Financial development; Economic growth; Income convergence;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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