THE RELATIONSHIP BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM BRICS COUNTRIES AND TURKEY

Abstract

The aim of this paper is to analyze the link and the direction of the relationship between financial development and economic growth in Turkey and BRICS countries for the period of 1994-2011. Moreover, the paper di- vides the financial market into two sub-markets as banking sector and stock market to examine their individual impact on economic growth. Fixed effect panel regression method and a relatively new panel causality technique, namely Dimutrescu-Hurlin test is applied to estimate the existence of the causal link between financial development and economic growth. The results of the analysis show that there is neither linear nor causal link for stock mar- ket development and economic growth, while statistically significant relationship exists between banking sector development and economic growth in the direction of economic growth to banking sector. In a nutshell, the results suggest an evidence for demand-following pattern in Turkey and BRICS Countries.

Keywords

• Financial Market Development
• Economic Growth
• Panel Regression
• Dumitrescu Hurlin Causality Test
• Unit Root Test

References

1. Akerlof, G. A. (1970). The market for" lemons": Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 488-500.
2. Altunç, Ö. F. (2008). Türkiye’de Finansal Gelişme ve İktisadi Büyüme Arasındaki Nedenselliğin Ampirik Bir Analizi. Eskişehir Osmangazi Üniversitesi İİBF Dergisi, 3(2), 113-127.
3. Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capital- ism, bad capitalism, and the economics of growth and prosperity. Yale University Press.
4. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2010). Financial institutions and markets across countries and over time: The updated financial development and structure database. The World Bank Economic Review, 24(1), 77-92.
5. Beck, T., & Levine, R. (2004). Stock markets, banks, and growth: Panel evidence. Journal of Banking & Finance, 28(3), 423-442.
6. Beck, T., Maksimovic, V., Demirgüç-Kunt, A., & Levine, R. (2000). Financial Structure and Economic Development: Firm, Industry, and Coun- try Evidence (Vol. 2423). World Bank Publications.
7. Calderón, C., & Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics, 72(1), 321-334.
8. Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth: evidence from panel unit root and cointegration tests. Journal of Development Economics, 73(1), 55-74.

9. Demetriades, P. O., & Hussein, K. A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of Development Economics, 51(2), 387-411.
10. Demirgüç-Kunt, A., & Levine, R. (1996a). Stock market development and financial intermediaries: stylized facts. The World Bank Economic Re- view,10(2), 291-321.
11. Demirgüç‐Kunt, A., & Maksimovic, V. (1998). Law, finance, and firm growth.The Journal of Finance, 53(6), 2107-2137.
12. Dumitrescu, E. I., & Hurlin, C. (2012). Testing for Granger non- causality in heterogeneous panels. Economic Modelling, 29(4), 1450-1460.
13. Dudian, M., & Popa, R. A. (2013). Financial development and economic growth in Central and Eastern Europe. Theoretical and Applied Economics,18(8 (585)), 59-68.
14. Filer, R. K., Hanousek, J., & Campos, N. F. (2000). Do stock markets promote economic growth?. CERGE-EI Working Paper Series, (151).
15. Fisher, A. G. (1939). Production, primary, secondary and tertiary. Economic Record, 15(1), 24-38.
16. Ghali, K. H. (1999). Financial development and economic growth: the Tunisian experience. Review of Development Economics, 3(3), 310-322.
17. Goldsmith, R. (1969). Financial Structure and Economic Development. New Haven: Yale university press.
18. Gurley, J. G., & Shaw, E. S. (1955). Financial aspects of economic development. The American Economic Review, 515-538.
19. Hassan, M. K., Sanchez, B., & Yu, J. S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of economics and finance, 51(1), 88-104.
20. Hassan, M. K., Sanchez, B., & Yu, J. S. (2012). A re-examination of financial development, stock markets development and economic growth. Applied Economics, 44(27), 3479-3489.
21. Hicks, J. R. (l969), A Theory of Economic History. London: Oxford University Press.
22. Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of econometrics, 115(1), 53-74.
23. Kar, M., & Pentecost, E. J. (2000). Financial development and economic growth in Turkey: further evidence on the causality issue. Economic Research Paper, 27.
24. King, R. G., & Levine, R. (1993a). Finance, entrepreneurship and growth. Journal of Monetary Economics, 32(3), 513-542.
25. King, R. G., & Levine, R. (1993b). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 717-737.
26. Levine, R. (1997). Financial development and economic growth: views and agenda. Journal of Economic Literature, 688-726.
27. Lucas, R. (1988). One the Mechanics of Economic Development. Journal of Monetary Economics, 22, 3-42.
28. Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46(1), 31-77.
29. Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American economic review, 537-558.
30. Morck, R., Shleifer, A., Vishny, R. W., Shapiro, M., & Poterba, J. M. (1990). The stock market and investment: is the market a side- show?. Brookings papers on economic Activity, 157-215.
31. Pagano, M. (1993). Financial markets and growth: an over- view. European Economic Review, 37(2), 613-622.
32. Parasız, İlker (2009). Para Banka ve Finansal Piyasalar (9. Baskı). Bursa: Ezgi Kitabevi Yayınları.
33. Patrick, H. T. (1966). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 174-189.
34. Robinson, J. (1952). The Generalization of the General Theory, in: The Rate of Interest and Other Essays. London: MacMillan, 67-142
35. Roubini, N. & Sala-i-Martin, X. (1991). Financial development, the trade regime, and economic growth. NBER Working Paper No. 3876.
36. Saci, K., Giorgioni, G., & Holden, K. (2009). Does financial development affect growth? Applied Economics, 41(13), 1701-1707.
37. Schumpeter, J.A. (1934) The Theory of Economic Development. ( R. Opie, Trans.) MA: Harvard University Press, (Original work published 1911.)