ECONOMIC GROWTH AND FINANCIAL DEVELOPMENT IN DEVELOPING COUNTRIES: AN EMPIRICAL INVESTIGATION USING PANEL CAUSALITY ANALYSIS OF CANNING AND PEDRONI

Abstract

This study aims to investigate the causal relationship between financial development (FD) and economic growth (EG) from 1990 to 2022. 45 developing countries and the approach recommended by Canning and Pedroni (2008) has been applied to determine this link. Based on the result of Unit Roots tests, the variables are first-order integrated. The cointegration connection indicates that, despite ongoing external shocks, the time series are linked in a long-term equilibrium. For the whole panel, the causality results show a long-run, unidirectional causal relationship. The long-run causal link from EG to FD is not supported by panel causality data. Examining group averages, there is no long-term causal relationship from FD to EG or EG to FD. The results demonstrate the validity of the supply-leading viewpoint and demonstrate that financial market reforms, financial market liberalization policies, and improved financial intermediation services all have a favorable impact on EG in the economies under discussion.

Keywords

• developing countries
• economic growth
• financial development

GELİŞMEKTE OLAN ÜLKELERDE EKONOMİK BÜYÜME VE FİNANSAL GELİŞME: CANNİNG VE PEDRONİ'NİN PANEL NEDENSELLİK ANALİZİ İLE AMPİRİK BİR ARAŞTIRMA

Abstract

Bu çalışma, 1990-2022 dönemi için finansal gelişme (FD) ile ekonomik büyüme (EG) arasındaki uzun vadeli nedensel bağlantıyı incelemektedir. Bu çalışmada 45 gelişmekte olan ülke için finansal gelişme (FD) ile ekonomik büyüme (EG) arasındaki ilişki Canning ve Pedroni (2008) panel nedensellik testi ile incelenmiştir. Birim Kök testleri sonucuna göre değişkenler birinci dereceden eşbütünleşiktir. Eşbütünleşme bağlantısı, devam eden dış şoklara rağmen zaman serilerinin uzun vadeli bir dengede bağlantılı olduğunu göstermektedir. Panelin tamamı için nedensellik sonuçları uzun vadeli, tek yönlü bir nedensellik göstermektedir. EG'den FD'ye uzun vadeli nedensellik bağlantısı panel nedensellik verileri tarafından desteklenmemektedir. Grup ortalamalarına bakıldığında FD'den EG'ye veya EG'den FD'ye uzun dönemli bir nedensellik ilişkisi bulunmamaktadır. Sonuçlar, arz odaklı bakış açısının geçerliliğini ortaya koymakta ve finansal piyasa reformlarının, finansal piyasa liberalizasyon politikalarının ve iyileştirilmiş finansal aracılık hizmetlerinin tamamının, tartışılan ekonomilerde EG üzerinde olumlu bir etkiye sahip olduğunu göstermektedir.

Keywords

• gelişmekte olan ülkeler
• ekonomik büyüme
• finansal gelişme

References

1. Ahmed, S.M. and Ansari, M. I. (1998). Financial Sector Development and Economic Growth: The South-Asian Experience. Journal of Asian Economics, 9(3), 503-517.
2. Bernanke, B. and Gertler, M. (1990). Financial Fragility and Economic Performance. The Quarterly Journal of Economics, 105(1), 87-114.
3. Bist, J.P. (2018). Financial Development and Economic Growth: Evidence From A Panel of 16 African and Non- African Low-Income Countries. Cogent Economics & Finance, 6(1) , 1-17.
4. Boyd, J. and Prescott, E.C (1986). Financial Intermediary-coalitions. Journal of Economic Theory, 38(2), 232-211.
5. Calderón, C. and Liu, L. (2003). The Direction of Causality Between Financial Development and Economic Growth. Journal of Development Economics, 72(1), 321-334.
6. Canning, D. and Pedroni, P. (2008). Infrastructure, Long‐run Economic Growth and Causality Tests for Cointegrated Panels. The Manchester School, 76(5), 504-527.
7. Choi, I. (2001). Unit Root Tests For Panel Data. Journal of International Money and Finance, 20, 249- 272.
8. Chudik, A. and Pesaran, M.H. (2011). Infinite-dimensional VARs and Factor Models. Journal of Econometrics, 163(1), 4-22.

9. Dahmani, M. Mabrouki, M. and Youssef, A.B. (2022). ICT, Trade Openness and Economic Growth in Tunisia: What is Going Wrong?. Economic Change and Restructuring, 55(4), 2317–2336.
10. Dawson, P.J. (2003). Financial Development and Growth in Economies in Transition. Applied Economics Letters, 10(13), 833-836.
11. Demetriades, P.O. and Hossein, K.A. (1996). Does Financial Development Cause Economic Growth? Time Series Evidence From 16 Countries. Journal of Development Economic, 51(2), 387-411.
12. Dritsakis, N. and Adamopoulos, A. (2004). Financial Development and Economic Growth in Greece: An Empirical Investigation with Granger Causality Analysis. International Economic Journal, 18(4), 547–559.
13. Eita, J.H. and Jordan, A.C. (2010). A Causality Analysis Between Financial Development and Economic Growth for Botswana. African Finance Journal, 12(1), 1-17.
14. Enisan, A.A. and Olufisayo, A.O. (2009). Stock Market Development and Economic Growth: Evidence From Seven Sub-Saharan African Countries. Journal of Economics and Business, 61(2), 162-171.
15. Friedman, M. and Schwartz, A.J. (1963). A Monetary History of The United States. Princeton: Princeton University Press.
16. Goldsmith, R.W. (1970). Financial Structure and Development. The Economic Journal, 80(318), 365-367.
17. Gounder, N. (2012). Financial Development and Economic Growth in Fiji: New Empirical Evidence. Griffith Business School Discussion Papers Economics, 2012-11, 1-15.
18. Greenwood, J. and Smith, B. (1997). Financial Markets in Development and The Development of Financial Markets. Journal of Economic Dynamics and Control, 21(1), 145-181.
19. Gurley, J.G. and Shaw, E.S. (1955). Financial Aspects of Economic Development. The American Economic Review, 45(4), 515-538.
20. Gursoy, C.T. and Al-Aali, H. (2000). Causal Relationship Between Financial and Economic Development in Gulf Countries. Dogus University Journal, 1(1), 124-134.
21. Habibullah, M.S. and Eng, Y.K. (2006). Financial Development Cause Economic Growth? A Panel Data Dynamic Analysis For The Asian Developing Countries. Journal of the Asia Pacific Economy, 11(4), 377-393.
22. Ismail, F., Ab-Rahim, R. and Pei-Chin, L. (2019). Nexus Between Financial Development and Economic Growth. International Journal of Academic Research in Business and Social Sciences, 9(1), 26-44.
23. Im, K.S., Pesaran, M.H. and Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53-74.
24. Irland, P.N. (1994). Money and growth: An Alternative Approach. American Economic Review, 84(1), 47-65.
25. Jung, W.S. (1986). Financial Development and Economic Growth: International evidence. Economic Development and Cultural Change, 34(2), 333-346.
26. Kao, Ch. (1999). Spurious Regression and Residual-based Tests For Cointegration in Panel Data. Journal of Econometrics, 90(1), 1-44.
27. Kar, M., Nazlıoglu, S. and Agır, H. (2014). Trade Openness, Financial Development and Economic Growth in Turkey: Linear and Nonlinear Causality Analysis. BDDK Journal of Banking and Financial Markets, 8(1), 63-86.
28. Khan, A. (2001). Financial Development and Economic Growth. Macroeconomics Dynamics, 5(3), 413-433.
29. King, R.G. and Levine, R. (1993). Finance, Entrepreneurship, and Growth: Theory and Evidence. Journal of Monetary Economics, 32(3), 513-42.
30. Levine, R. (2005). Finance and Growth: Theory and Evidence. Handbook of Economic Growth, 1(A), 865-934.
31. Levin, A., Lin, C. and Chu, C.J. (2002). Unit Root Tests in Panel Data: Asymptotic and Finite-sample Properties. Journal of Econometrics, 108(1), 1-24.
32. Levine, R., Loayza, N. and Beck, T. (2000). Financial Intermediation and Growth: Causality and Causes. Journal of Monetary Economics, 46(1), 31-77.
33. Levine, R., and Zervos, S. (1997). Stock Market, Banks and Economic Growth. The American Economic Review, 88(3), 537-558.
34. Lucas, R.E. (1988). On the Mechanics of Economic Development. Journal of Monetary Economics, 22(1988), 3- 42.
35. Luintel, K.B. and Khan, M. (1999). A Quantitative Reassessment of The Finance Growth Nexus: Evidence From A Multivariate VAR. Journal of Development Economics, 60(2), 381- 405.
36. Mckinnon, R.I. (1973). Money and Capital in Economic Development. Washington, D.C.: Brookings Institution Press.
37. Meier, G.M. and Seers, D. (1984). Pioneers in Development. World Development, 13(12), 1307-1309.
38. Menyah, K., Nazlioglu, S. and Wolde-Rufael, Y. (2014). Financial Development, Trade Openness and Economic Growth in African Countries: New Insights From a Panel Causality Approach. Economic Modelling, 37(C), 386– 394.
39. Mike, F. and Alper, A. E. (2021). The Effect of Financial Development Level on Economic Growth in Fragile Economies. Business and Economics Research Journal, 12(1), 49-64.
40. Ofori-Abebrese, G., Pickson, R.B. and Diabah, B.T. (2017). Financial Development and Economic Growth: Additional Evidence From Ghana. Modern Economy, 8(2), 282-297.
41. Pesaran, M.H. (2004). General Diagnostic Tests For Cross Section Dependence in Panels. Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge, 0435.
42. Pata, U.K. and Ağca, A. (2018). Cointegration and Causalıty Relationship Between Financial Development and Economic Growth: The Case of Turkey. Osmaniye Korkut Ata University Journal of Economics and Administrative Sciences, 2(2), 115-128.
43. Patrick, H. T. (1966). Financial Development and Economic Growth in Underdeveloped Countries. Economic Development and Cultural Change, 14(2), 174-189.
44. Perera, N. and Paudel, R.C. (2009). Financial Development and Economic Growth in Sri Lanka. Applied Econometrics and International Development, 9(1), 157-164.
45. Pedroni, P. (1999). Critical Values For Cointegration Tests In Heterogeneous Panels With Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-670.
46. Pradhan, R. P., Arvin, M. B., Bahmani, S., Hall, J. H. and Norman, N. R. (2017). Finance and Growth: Evidence From The ARF Countries. The Quarterly Review of Economics and Finance, 66(C), 136-148.
47. Robinson, J. (1952). The Generalisation of The General Theory, in The Rate of Interest and Other Essays. London: Macmillan.
48. Schumpeter, J.A. (1911). The Theory of Economic Development. Cambridge: Harvard University Press.
49. Shan, J., Morris, A. and Sun, F. (2001). Financial Development and Economic Growth: An Egg-Chicken Problem? Review of International Economics, 9(3), 443-54.
50. Shahbaz, M., Ahmed, N. and Ali, L. (2008). Stock Market Development and Economic Growth: ARDL Causality in Pakistan. International Research Journal of Finance and Economics, 14(1), 182-195.
51. Shaw, E.S. (1973). Financial Deepeninig in Economic Development. New York: Oxford University Press.
52. Stern, N. (1989). The Economics of Development: A Survey. The Economic Journal, 99(397), 597-685.
53. Swamy, V. and Dharani, M. (2018). An Alternate Approach in Exploring The Causal Link Between Financial Development and Economic Growth-evidence From Advanced Economies. International Journal of Finance and Economics, 23(1), 55-76.
54. Tadesse, T., and Abafia, J. (2019). The Causality Between Financial Development and Economic Growth in Ethiopia: Supply Leading vs Demand Following Hypothesis. Journal of Economics and Financial Analysis, 3(1), 87-115.
55. Thangavelu, S.M. and Ang, J.B. (2004). Financial Development and Economic Growth in Australia: An Empirical Analysis. Empirical Economics, 29(2), 247-260.
56. Tobin, J. and Brainard, W.C. (1963). Financial Intermediaries and The Effectiveness of Monetary Control. The American Economic Review, 53(2), 383-400.
57. Townsend, R.M (1979), Optimal Contracts and Competitive Markets with Costly State Verification. Journal of Economic Theory, 21(2), 265-293.
58. Tunalı, H. and Onuk, P. (2017). The Causality Relation Between Financial Development and Economic Growth: The Case of Turkey. Journal of Economic Policy Researches, 4(1), 1-15.
59. Wolde-Rufael, Y. (2009). Re-examining The Financial Development and Economic Growth Nexus in Kenya. Economic Modelling, 26(6), 1140–1146.
60. World Bank. (2023). https://databank.worldbank.org/source/world-development-indicators
61. Yildirim, S., Ozdemir, B. K., and Dogan, B. (2013). Financial Development and Economic Growth Nexus in Emerging European Economies: New Evidence From Asymmetric Causality. International Journal of Economics and Financial Issues, 3(3), 710-722.