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A Quality Dimension? A Re-appraisal of Financial Development and Economic Growth Nexus in a Quality-Quantity Setting

Author

Listed:
  • Rosen Azad Chowdhury

    (Department of Economics, Swansea University)

  • Dilshad Jahan

    (Department of Economics, Swansea University)

  • Tapas Mishra

    (Southampton Business School, University of Southampton)

  • Mamata Parhi

    (Roehampton Business School, University of Roehampton)

Abstract

Despite the existence of a robust body of theoretical and empirical literature on the subject, there is an unresolved ambiguity on the exact nature of the relationship between financial development and economic growth. In this context, this paper re-examines the relationship by emphasizing on the ‘quality’ essence of financial development - a role, notwithstanding its significance (especially for developing countries), has clearly been underemphasized. We advance a measure of this ‘quality’ attribute by degrees of cost efficiencies and profit functions. The quality proxy is combined with a measure of quantity attribute of financial development in the form of broad money growth and bank credit to the private sector. Both measures portend relative stability of banks concerning efficiency in fund channeling. Using data for 191 banks spread over eight South and South-East Asian countries for a period of ten years and employing System GMM panel estimations, we demonstrate that a mixture of both quality and quantity of financial development holds key information on the exact direction of travel of economic growth among these countries. Further, results from panel VAR estimation provide robustness to our predictions.

Suggested Citation

  • Rosen Azad Chowdhury & Dilshad Jahan & Tapas Mishra & Mamata Parhi, 2023. "A Quality Dimension? A Re-appraisal of Financial Development and Economic Growth Nexus in a Quality-Quantity Setting," Working Papers 2023-02, Swansea University, School of Management.
    • Handle: RePEc:swn:wpaper:2023-02
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    References listed on IDEAS

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    Keywords

    Quality and quantity of financial development; Economic growth; Efficiency; Developing countries; Panel VAR;
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