Financial Development and Economic Growth in

2011

The positive effects of financial development on economic growth have encouraged researchers to study the determinants of financial development. Based on the theoretical and empirical studies undertaken, institutions, openness of trade and financial markets, legal tradition, and political economy are identified as factors promoting the financial system. Of these, political economy factors, which can have both direct and indirect effects through other determinants, could be considered the most influential factors in financial development. Variations in the political economy of countries could well explain variations in their financial development. Although all studies show the significant effects of these determinants on financial development, further research is needed to assess the impact of each determinant and the policies that could best promote financial development.

International journal of academic research in business & social sciences, 2018

Tanzania economy like of many other emerging market have seen rapid increase number of banks locally and foreign owned since financial sector liberalization in 1990's even though clear impact of financial sector on economic growth is hard to be singled out. The paper investigates empirically the long run relationship between selected proxies of financial development and economic growth in the Tanzanian context. Using the vector error correction model (VECM), the study finds that financial development is cointegrated with economic growth. That is there is a long run relationship between chosen proxies of financial development and economic growth in the country. This paper used broad money supply M2, foreign direct investment, customer deposits in foreign and domestic banks, credit extended by foreign and domestic banks as percentage of GDP as proxies for financial development. While per capita growth rate used to measure economic growth. The results also show the need to develop even further the financial sector through appropriate regulatory and macroeconomic policies in order to ensure sustainable economic growth as well as economic development. For robustness of the results other test were also performed in this study such as Augmented-Dickey Fuller unit root test and Johansen cointegration test.

SSRN Electronic Journal, 2000

This paper aims to review the current state of the theoretical and empirical research on the relationship between financial development and economic growth. Theoretical studies show that risk aversion and asymmetric information between borrowers and lenders motivate the existence of financial intermediaries and financial markets. Differences in the level of development of financial systems across countries give rise to very different effects on capital accumulation and technological innovation which are the main sources of long-run economic growth. From an empirical point of view, research has progressed by adopting different strategies to (i) reconcile the theoretical functions of the financial system and data availability, (ii) identify the specific channels through which financial development might enhance economic growth and (iii) address biases due to reverse causality. Both theoretical and empirical evidence find a clear positive link between financial development and economic growth, thereby suggesting that policy makers should take into account the role of financial systems to sustain growth. This paper also highlights several areas needing additional research. JEL classification: G0; O0

This paper examines causality relationship between financial development and economic growth in Tanzania over the period 1980 to 2012. In time series context, recently econometric techniques were used; namely Augmented Dickey and Fuller test (ADF) for unit roots test, Johansen test for Co-intergration test, Vector error correction model (VECM) tested for short run and long run causality, a pairwise Granger causality test used to establish the direction of causality and Variance decomposition (VD) under VAR framework applied for validating strengths of findings outside the estimated sampling period. In overall empirical findings can be summarized as follows. Firstly, there is long-run relationship between financial development and economic growth. Secondly, granger causality test suggests economic growth causes financial development in a short-run when broad money to nominal GDP and liquidity liability to nominal GDP used, however when credit to private sector to nominal GDP was used findings confirmed evidence of bidirectional causality between financial development and economic growth, and in a long-run causality run only from Economic growth to financial development even in outside the estimated sampling period. Thirdly, financial sector has been effective in promoting economic growth in a short run only and economic growth variable was the most exogenous leading variable than others suggesting, financial sector has played little role in promoting economic growth in Tanzania. Lastly, capital accumulation channel via gross domestic investments to nominal GDP links financial development and economic growth in a short run only, suggesting long-term financial infrastructures that are necessary for successful promoting investments for spurring economic growth still remain weak in Tanzania. These findings are contrary to the convectional results favored only supply view. Although study has confirmed mixed results on the direction of causality between financial development and economic growth in Tanzania ,in view of feedback effect results, study recommend more efforts should be devoted to the deepening of financial sector by enhancing competition, improving business environment, investing on human resources and legal environment.

2011

This paper analyzes the bright and dark sides of the financial development process through the lenses of the four fundamental frictions to which agents are exposedinformation asymmetry, enforcement, collective action, and collective cognition. Financial development is shaped by the efforts of market participants to grind down or circumvent these frictions, a process further spurred by financial innovation and scale and network effects. The analysis leads to broad predictions regarding the sequencing and convexity of the dynamic paths for a battery of financial development indicators. The method This paper is a product of the Chief Economist Office for Latin America and the Caribbean Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at [email protected], [email protected], and [email protected]. used also yields a robust way to benchmark the financial development paths followed by individual countries or regions. The paper explores the reasons for path deviations and gaps relative to the benchmark. Demandrelated effects (past output growth), financial crashes, and supply-related effects (the quality of the enabling environment) all play an important role. Informational frictions are easier to overcome than contractual frictions, not least because of the transferability of financial innovation across borders.

The relationship between financial development and economic growth has been subject to the considerable debate in the literature of development and growth. While empirical studies often provide a direct relationship between financial development proxies and growth, much controversy remains about how these results should be interpreted. The study, therefore, discusses four main sources of controversy, namely: the selection and measurement of financial development indicators, the causality direction of the financial development and economic growth, the use of empirical approaches to the finance-growth hypothesis, and the debate concerning the channels by which financial development promotes economic growth.

Journal of International Financial Markets, Institutions and Money, 2016

Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

his paper presents a simple endogenous growth model to demonstrate the role of financial development in economic growth. It further explores the causal relationship between financial development and economic growth. Lastly, it reviews the empirical evidence on the relationship between financial development and economic growth. In reviewing the empirical literature the paper highlights issues worthy of consideration in future empirical studies on the finance-growth nexus, especially in developing countries. Such issues among others include appropriate indicators of financial development that will best capture the functions perform by the financial system and the empirical modelling framework.

This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. It describes the role of financial system development in economic growth at the macro level, both theoretically and empirically. It also describes briefly the relationship of corporate finance and firm performance. It finally concludes the review and presents some policy implications in view of the reviewed literature. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

Tanzania economy like of many other emerging market have seen rapid increase number of banks locally and foreign owned since financial sector liberalization in 1990's even though clear impact of financial sector on economic growth is hard to be singled out. The paper investigates empirically the long run relationship between selected proxies of financial development and economic growth in the Tanzanian context. Using the vector error correction model (VECM), the study finds that financial development is cointegrated with economic growth. That is there is a long run relationship between chosen proxies of financial development and economic growth in the country. This paper used broad money supply M2, foreign direct investment, customer deposits in foreign and domestic banks, credit extended by foreign and domestic banks as percentage of GDP as proxies for financial development. While per capita growth rate used to measure economic growth. The results also show the need to develop even further the financial sector through appropriate regulatory and macroeconomic policies in order to ensure sustainable economic growth as well as economic development. For robustness of the results other test were also performed in this study such as Augmented-Dickey Fuller unit root test and Johansen cointegration test.