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Financial Development and Economic Growth: Do Outliers Matter?

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  • Chung-Hua Shen
  • Xingyu Fan
  • Dengshi Huang
  • Hongquan Zhu
  • Meng-Wen Wu

Abstract

This study examines the effect of outliers on causal relationship between financial development and economic growth using 48 countries from 1988 to 2014. The dynamic panel model of Levine, Loayza, and Beck (2000) is used to examine this issue. We propose a novel approach by combining the least square dummy variable correction method (LSDVC) to remove the estimates bias in the dynamic panel model and the least trimmed squares (LTS) to control outlier influence. The combination of these two methods is referred to as LSDVC + LTS. Our results show a counter-intuitive evidence that bank development negatively affects economic growth when the outlier influence is ignored. This counter-intuitive evidence holds even when the conventional winsorization method is used to control the outliers. However, bank development exhibits a positive influence on economic growth once the proposed approach LSDVC + LTS is adopted. Also, stock market development exhibits a positive effect on economic growth regardless of the outliers.

Suggested Citation

  • Chung-Hua Shen & Xingyu Fan & Dengshi Huang & Hongquan Zhu & Meng-Wen Wu, 2018. "Financial Development and Economic Growth: Do Outliers Matter?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(13), pages 2925-2947, October.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:13:p:2925-2947
    DOI: 10.1080/1540496X.2018.1440547
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    Cited by:

    1. Guangdong Xu, 2022. "From financial structure to economic growth: Theory, evidence and challenges," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(1), February.
    2. Shikha Singh & Mandira Sarma, 2020. "Financial Structure and Stability: An Empirical Exploration," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 9-32.
    3. Xu Guangdong, 2021. "Reassessing the Literature on the Relationship Between Financial Structure and Economic Growth," Review of Economics, De Gruyter, vol. 72(2), pages 149-182, August.
    4. Marjorie Morales-Casetti & Marco Bustos-Gutiérrez & Franco Manquepillán-Calfuleo & Jorge Hochstetter-Diez, 2024. "Quality of Government, Democracy, and Well-Being as Determinants in Achieving the Sustainable Development Goals," Sustainability, MDPI, vol. 16(13), pages 1-16, June.
    5. Krinichansky, Konstantin & Yurevich, Maksim, 2023. "Finance and growth: Nonlinearity and structural shifts," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 72, pages 5-22.

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