The dynamics of banking sector and stock market maturity and the performance of Asian economies

Rudra P. Pradhan · Mak B. Arvin · Neville R. Norman · John Henry Hall

47 citations0/0 files storedJournal of economic and administrative sciences.

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Finance, Markets, and Regulation

Abstract

Purpose – The purpose of this paper is to examine the nature of causal relations between banking sector maturity, stock market maturity, and four aspects of performance and operation of the economy: economic growth, inflation, openness in trade, and the degree of government involvement in the economy. Design/methodology/approach – The authors look for possible links between the variables by conducting panel cointegration and causality tests, using a large sample of Asian countries over the period 1960-2011. Novel panel data estimation methods allow for robust estimates, using both variation between countries and variation over time. Findings – The study identifies interesting causal links among the variables deriving uniquely from our innovations. In particular, The paper finds that for all regions considered, banking sector maturity and stock market maturity are causally linked, sometimes in both directions. Furthermore, stock market maturity may lead to economic growth, both directly and indirectly through indicators such as inflation and trade openness. The findings also support the notion that economic growth affects the maturity of the stock market in most regions. Practical implications – The results lend support to the notion that a mature financial sector is a key contributor to generating economic growth. Furthermore, economic growth itself has the potential to bring about maturity in the financial sector. Originality/value – The paper uses sophisticated principal-component analysis, panel cointegration, and Granger causality tests, methods not used in this literature before. The method was applied to recent data pertaining to 35 Asian countries – a group of countries that has previously not been adopted in this literature.

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References

1987Co-Integration and Error Correction: Representation, Estimation, and Testing 2003The Theory of Economic Development 1988Statistical analysis of cointegration vectors 2002Unit root tests in panel data: asymptotic and finite-sample properties 1993Finance and Growth: Schumpeter Might Be Right 1999Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors 2004PANEL COINTEGRATION: ASYMPTOTIC AND FINITE SAMPLE PROPERTIES OF POOLED TIME SERIES TESTS WITH AN APPLICATION TO THE PPP HYPOTHESIS n.d.Financial Development and Economic Growth: Views and Agenda

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