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Financial Development And Economic Growth: A New Investigation

Author

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  • HUIRAN PAN

    (California State University, Fullerton)

  • CHUN WANG

    (City University of New York)

Abstract

This article applies a Bayesian dynamic factor model to examine the relationship between financial development and economic growth from a new angle. We estimate the common, country, and idiosyncratic factors that drive the dynamics and co-movement of financial development and economic growth across 89 countries in three different income groups, namely industrial countries (INDs), emerging market economies (EMEs), and other developing countries (ODCs), over the period 1970 to 2009. The results indicate that the common factor plays a more significant role in explaining the variance of output growth in INDs and EMEs, but not in ODCs. In contrast, financial development variability is mainly driven by the country and idiosyncratic factors. We also analyze the relation between country characteristics and the relative importance of the factors.

Suggested Citation

  • Huiran Pan & Chun Wang, 2013. "Financial Development And Economic Growth: A New Investigation," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(1), pages 27-46, March.
    • Handle: RePEc:jed:journl:v:38:y:2013:i:1:p:27-46
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    3. Tanzeem HASNAT & Shahid ASHRAF & Umer J. BANDAY, 2016. "Growth-finance nexus: Empirical evidence from India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 319-330, Autumn.
    4. EZZAHID, Elhadj & ELOUAOURTI, Zakaria, 2017. "Financial development and total factors productivity channel: Evidence from Africa," MPRA Paper 81764, University Library of Munich, Germany.
    5. Pradhan, Rudra P. & Arvin, Mak B. & Norman, Neville R., 2015. "The dynamics of information and communications technologies infrastructure, economic growth, and financial development: Evidence from Asian countries," Technology in Society, Elsevier, vol. 42(C), pages 135-149.
    6. Shuibin Gu & Gigamon Joseph Prah, 2020. "The Effect of International Financial Reporting Standards on the Association between Foreign Direct Investment and Economic Growth: Evidence from Selected Countries in Africa," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 8(1), pages 21-29.
    7. Taofeek Olusola Ayinde & Olumuyiwa Ganiyu Yinusa, 2016. "Financial Development and Inclusive Growth in Nigeria: A Threshold Analysis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(5), pages 166-189, OCTOBER.
    8. Wang, Chao & Lim, Ming K. & Zhang, Xinyi & Zhao, Longfeng & Lee, Paul Tae-Woo, 2020. "Railway and road infrastructure in the Belt and Road Initiative countries: Estimating the impact of transport infrastructure on economic growth," Transportation Research Part A: Policy and Practice, Elsevier, vol. 134(C), pages 288-307.
    9. Jaspreet Kaur & Navita Nathani & Resham Chopra, 2019. "Interactions between macro-prudential framework and macroeconomic indicators," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 46(1), pages 59-73, March.
    10. Yuxiang Yan & Wusheng Hu, 2020. "Does Foreign Direct Investment Affect Tropospheric SO 2 Emissions? A Spatial Analysis in Eastern China from 2011 to 2017," Sustainability, MDPI, vol. 12(7), pages 1-12, April.
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    More about this item

    Keywords

    Financial Development; Economic Growth; Dynamic Factor Model; Bayesian Analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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