• ISSN: 2010-023X
    • Frequency: Bimonthly
    • DOI: 10.18178/IJTEF
    • Editor-in-Chief: Prof.Tung-Zong (Donald) Chang
    • Executive Editor: Ms. Cherry L. Chen
    • Abstracting/ Indexing:  ProQuest, Crossref, Electronic Journals Library , EBSCO, and Ulrich's Periodicals Directory
    • E-mail: ijtef@ejournal.net
IJTEF 2018 Vol.9(3): 116-120 ISSN: 2010-023X
DOI: 10.18178/ijtef.2018.9.3.599

Financial Development And Economic Growth Revisited: Time Series Evidence

Ariuna Taivan
Abstract—This paper examines the causality between financial development and economic growth for over 80 countries around the world with different levels of per capita income during 1970-2014. I employed the vector autoregression (VAR) approach to conduct Granger causality tests to determine the direction of causality relationship between financial development and economic growth. The results provide evidence of two of the three main views on the link between financial development and economic growth: the supply leading theory (financial development causes economic growth or positive causality); and the demand following response (economic growth causes financial development or reverse causality). The results of this study suggest that: 1) there is a strong evidence that causality exists between the financial development and economic growth, 2) direction of causality is bidirectional in countries with higher GDP per capita; 3) an evidence of positive causality running from finance to real sector growth for middle- and low-income countries. The findings are consistent with earlier literature in that the direction of causality may be country specific. However, it does not fully support King and Levine conclusion that finance is a leading sector to long run economic growth. The findings of this research give some further guidance as to whether a well-developed financial sector is a necessary condition for a higher growth rates for developing countries and provide an important policy implication both for OECD countries as well as for countries that have financial sectors that are comparatively underdeveloped.

Index Terms—Financial development, economic growth, granger causality, VAR.

Ariuna Taivan is with University of Minnesota Duluth, USA (e-mail: ataivan@d.umn.edu)

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Cite: Ariuna Taivan, "Financial Development And Economic Growth Revisited: Time Series Evidence," International Journal of Trade, Economics and Finance vol.9, no.3, pp. 116-120, 2018.

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