DOI: https://doi.org/10.18371/fcaptp.v3i26.121844

CAUSAL LINK BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: THE CASE OF TRANSITION COUNTRIES

Zamira Oskonbaeva

Abstract


The financial market is an important element of any market economy. The study of the impact of financial development on the country’s economic growth is a very important and urgent topic. The financial sector plays a key role both in developed and developing countries. Financial markets play a critical role in the distribution of capital, financial intermediation, the transformation of available funds into investment, the distribution and diversification of risks. A well-functioning financial market increases productivity and significantly affects the country’s economic growth.

The main objective of this study is to investigate the causal relationship between financial development, trade openness and economic growth. The empirical analysis of this study consists on panel data of 9 transition countries (Ukraine, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova and Tajikistan) over the period 1998 to 2015. Inorder to investigate the causal link between financial development and economic growth a three-stage Panel Granger causality test was employed. Firstly stationarity properties of the series are examined with the help of Pesaran (2007) panel unit root test. Then Westerlund (2007) panel cointegration method is applied. In the final stage Panel Granger causality test is performed.

The results obtained suggest that there is evidence of a bidirectional causality between financial development and economic growth in the short-run. Policy makers in transition countries should consider the impact of financial development on economic growth.


Keywords


financial development; panel data; economic growth; transition countries; panel Granger causality test, panel cointegration method; Pesaran panel unit root test

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References


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GOST Style Citations


Apergis N. Financial deepening and economic growth linkages: a panel data analysis / N. Apergis, I. Filippidis, C. Economidou // Review of World Economics. — 2007. — № 143 (1). — P. 179—198.

Arestis P. Financial development and economic growth: assessing the evidence / P. Arestis, P. Demetriades // The Economic Journal. — 1997. — № 107. — P. 783—799. doi:10.1111/j.1468-0297.1997.tb00043.x.

Baltagi B. On Testing for Cross-sectional Dependence in Panel Data Models / B. Baltagi, Q. Feng, Ch. Kao. — 2008. — Available at : https://www.maxwell.syr.edu/uploadedFiles/econ/BFK20081023.pdf?n=2579.

Bagehot W. Lombard street: a description of the money market / W. Bagehot // E. P. DUTTON and COMANY, 1873. — New York: Reprint 1920.

Friedman M. Monetary history of the United States, 1867—1960 / M. Friedman, A. Schwartz. — Princeton : Princeton University Press, 1963.

Demetriades P. O. Does financial development cause economic growth? Time-series evidence from 16 countries / P. O. Demetriades, K. A. Hussein // Journal of Economic Dynamic Control. — 1996. — № 51. — Р. 387—411. doi:10.1016/S0304-3878(96)00421-X.

Ireland P. N. Money and growth: an alternative approach / P. N. Ireland // The American Economic Review. — 1994. — № 84. — Р. 47—65.

Golodniuk I. Financial Systems and Financial Reforms in CIS Countries / I. Golodniuk // Studies and Analyses. — 2005. — № 306. — Р. 1—19.

Greenwood J. Financial markets in development, and the development of financial markets / J. Greenwood, B. Smith // Journal of Economic Dynamics and Control. — 1997. — № 21. — Р. 145–181. doi:10.1016/0165-1889(95)00928-0.

Gurley J. G. Financial Aspects of Economic Development / J. G. Gurley, E. S. Shaw // American Economic Review. — 1955. — № 45. — Р. 515—38.

King R. G. Finance and Growth: Schumpeter might be right / R. King, R. Levine // The Quarterly Journal of Economics. — 1993. — № 108 (3). — Р. 717—37.

King R. G. Finance, Entrepreneurship and Growth: Theory and Evidence // Journal of Monetary Economics. — 1993. — № 32 (3). — Р. 513—42.

Kulhánek L. The Financial and Banking Sectors in Transition Countries / L. Kulhánek, S. Polouček, D. Stavárek, S. Polouček (Eds). // Reforming the Financial Sector in Central European Countries. Studies in Economic Transition. — London : Palgrave Macmillan, 2004.

Lucas R. E. On the mechanics of economic development / R. E. Lucas // Journal of Monetary Economics. — 1988. — № 22. — Р. 3—42.

Pesaran M. H. General diagnostic tests for cross section dependence in panels / Pesaran H. // Working Paper / University of Cambridge. — 2004. — № 0435.

Pesaran M. H. A Simple Panel Unit Root Test in the Presence of Cross-section Dependence / M. H. Pesaran // Journal of Applied Econometrics. — 2007. — № 22. — Р. 265—312.

Schumpeter J. The theory of economic development: An inquiry into profits, capital, credit, interest and the business cycle / J. Schumpeter. — Cambridge : Harvard University Press, 1911.

Westerlund J. Testing for error correction in panel data / J. Westerlund // Oxford Bulletin of Economics and Statistics. — 2007. — № 69 (6). — Р. 709—748.

World Bank [Electronic resource]. — Available at : www.worldbank.org





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ISSN (print) 2306-4994, ISSN (on-line) 2310-8770