Does Financial Development Cause Economic Growth? A Panel Data Dynamic Analysis for the Asian Developing Countries

Muzafar Shah Habibullah · Yoke‐Kee Eng

151 citations0/0 files storedJournal of the Asia Pacific Economy

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Abstract

This paper examines the causal relationship between financial development and economic growth of the Asian developing countries from a panel data perspective and uses the system GMM technique developed by Arellano & Bover (1995) Arellano, M. and Bover, O. 1995. Another look at the instrumental variable estimation of error-component models. Journal of Econometrics, 68: 5–27. [CROSSREF][CSA] [Google Scholar] and Blundell & Bond (1998) Blundell, R. W. and Bond, S. R. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87: 29–52. [CROSSREF][CSA] [Google Scholar] and conducts causality testing analysis. The panel data sets involve 13 Asian developing countries: Bangladesh, India, Indonesia, South Korea, Lao PDR, Malaysia, Myanmar, Nepal, Pakistan, Philippine, Singapore, Sri Lanka and Thailand for the period 1990–1998. The result of our study is in agreement with other causality studies by Calderon & Liu (2003) Calderon, C. and Liu, L. 2003. The direction of causality between financial development and economic growth. Journal of Development Economics, 72: 321–334. [CROSSREF][CSA][Crossref], [Web of Science ®] , [Google Scholar], Fase & Abma (2003) Fase, M. M. G. and Abma, R. C. N. 2003. Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14: 11–21. [CROSSREF][CSA][Crossref] , [Google Scholar], and Christopoulos & Tsionas (2004) Christopoulos, D. K. and Tsionas, E. G. 2004. Financial development and economic growth: evidence from panel unit root and cointegration tests. Journal of Development Economics, 73: 55–74. [CROSSREF][CSA][Crossref], [Web of Science ®] , [Google Scholar] that financial development promotes growth, thus supporting the old Schumpeterian hypothesis and Patrick's ‘supply-leading’ hypothesis.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1987Co-Integration and Error Correction: Representation, Estimation, and Testing 1988On the mechanics of economic development 1998Initial conditions and moment restrictions in dynamic panel data models 2003The Theory of Economic Development 1995Another look at the instrumental variable estimation of error-components models 1995Initial conditions and moment restrictions in dynamic panel data models 1981Biases in Dynamic Models with Fixed Effects

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