Bank-based financial development and economic growth

Sheilla Nyasha · Nicholas Mbaya Odhiambo

29 citations0/0 files storedJournal of Financial Economic Policy

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Economic Growth and Development

Abstract

Purpose – The purpose of this paper was to survey the existing literature on the causal relationship between bank-based financial development and economic growth, highlighting the theoretical and empirical evidence from recent work. Although some previous studies have attempted to conduct a survey of the existing research on the finance-growth nexus, the majority of these studies have failed to distinguish between bank-based and market-based financial developments. To our knowledge, this may be the first study of its kind to survey the existing research on the causal relationship between bank-based financial development and economic growth – in both developed and developing countries. Design/methodology/approach – Overall, our study shows that most of the literature reviewed in this paper either supports bidirectional causality between bank-based financial development and economic growth or reinforces the conventional supply-leading response phenomenon. Notwithstanding this outcome, the study also finds the literature in favour of a demand-following response to be increasing – in both number and substance – especially in recent years. Findings – The paper, therefore, concludes that the causal relationship between financial development and economic growth is not clear-cut and that the notion that financial development automatically leads to economic growth is merely based on prima facie or superficial evidence. Originality/value – Although some previous studies have attempted to conduct a survey of the existing research on the finance-growth nexus, the majority of these studies have failed to distinguish between bank-based and market-based financial developments. To our knowledge, this may be the first study of its kind to survey the existing research on the causal relationship between bank-based financial development and economic growth – in both developed and developing countries.

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References

2003The Theory of Economic Development 1995Statistical inference in vector autoregressions with possibly integrated processes 2000Financial intermediation and growth: Causality and causes 2000Finance and the sources of growth 1993Finance, entrepreneurship and growth 1974Shaw, Edward S., Financial Deepening in Economic Development, New York, Oxford University Press, 1973, xii + 260 pp. ($7.50 cloth, $3.50 paper)1970Financial Structure and Development.1990Financial Development, Growth, and the Distribution of Income

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