The authors also state that financial deepening is rapid before the creation of a stock exchange and slower subsequently. (2) is the β-convergence coefficient augmented by 1. Niepodleglosci 162, 02-554, Warsaw, Poland, Treasury Department, Warsaw School of Economics, Al. J Policy Model 21:213–241. In the case of a squared relationship, we deal with a parabola of which half is upward sloping and another half is downward sloping. Figure 5 shows an interesting outcome because the results for the turnover ratio of stocks traded are similar to those for market capitalization of listed companies. We showed above a wide literature review on the issues regarding the stability of the financial sector and the impact of the financial sector development on economic growth, but the discussion of these issues is thus by no way closed. (2012), and Cecchetti and Kharroubi (2015). Brookings Institution, Washington, Mishkin FS (2002) Ekonomika pieniądza, bankowości i rynków finansowych (przekład A. Minkiewicz). The growth of trade in the country also induces employment opportunities. Research covers its different elements, as well as interrelations among them, and more often, especially as the result of the last crisis, the identification of risks for its stable and effective functioning, indicating, among others the occurrence of system risk. And a large body of evidence suggests that this effect is causal: hence financial development is not simply an outcome of economic growth; it contributes to this growth. Although at the beginning, the prevailing view was that there is an influence of the economic growth on the development of the financial system. This process of reducing the costs of acquiring information, enforcing contracts, and making transactions resulted in the emergence of financial contracts, markets, and intermediaries. Appl Econ. As we test the nonlinear impact of the financial system on economic growth, the squared form of this variable, (fin_dev)2, also appears in the regression equations. While the life expectancy of a person bor… We have a standing example of European Common Market which has gone to the extent of creating a common currency, representing several countries in Western Europe. The problems regarding the relationship between the financial sector and economic growth strengthened after the last global crisis and the crisis in the euro zone. First, all the coefficients for this variable in any form (as level, squared level, or difference) and in any model are statistically significant (with p values not exceeding 0.001). Empirica 44, 295–337 (2017). The impact of the ﬁnancial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries Mariusz Prochniak1 • Katarzyna Wasiak2 Published online: 30 March 2016 The Author(s) 2016. Empirica J Eur Econ 41:53–68. In the case of some variables (e.g. Taking into account the above problems, in this study we apply the Blundell and Bond’s GMM system estimator. All the four functions plotted on the graph are concave and have the shape of a downward sloping parabola (ending just before the peak of the parabola). The model (2) is equivalent to the formula (1). Overall, the results indicate that financial system regulation has a statistically significant influence on output and productivity growth, in particular via the impact on industrial sectors relying more heavily on external sources of funding. doi:10.1007/s10663-013-9227-x, Blanco L (2009) The finance-growth link in Latin America. In the case of levels, each financial variable is also included in a squared form to account for eventual nonlinearities. Namely, for the last years the level of indebtedness of many countries, especially EU countries, became extremely high. Enterprises from one country can draw on the financial resources of another through FDI, in the form of joint ventures or full foreign ownership. Any business requires two types of capital namely, fixed capital and working capital. Econ Lett 74:339–345. Since credit is one of the main sources of financing investment outlays, credit expansion is naturally an important economic growth determinant. fin_dev is the financial sector development (stability) variable. Nevertheless, the analysis demonstrates that too big size of the financial sector, i.e. J Monet Econ 22:3–42, Lucchetti R, Papi L, Zazzaro A (2001) Banks’ inefficiency and economic growth: a micro-macro approach. domestic credit, which also turned out to be negatively correlated (in terms of levels) with economic growth. The financial system is capable of bringing an uniform interest rate throughout the country by which there will be balanced movement of funds between centres which will ensure availability of capital for all kinds of industries. The financial system: Accumulates savings, assuring at the same time wide access to its diversified forms. In this study, we analyze the variables that can be rather treated as outputs of the financial sector. 2. This mechanism, strengthened by the global crisis and the crisis in the euro zone, is confirmed by our results. So, to obtain the standard coefficient on initial income level in the untransformed β-convergence regression, where the growth rate is the explained variable, it is necessary to subtract 1 from the coefficient (1 + α1) in model (2). 16, No. Rev Dev Econ 12:803–817. Additionally, the author also proves that the growth-promoting effects of financial intermediation are more predominant in low-income than in high-income LDCs. The study covers the 1993–2013 period and two groups of countries: 28 EU countries and 34 OECD economies. As data in Table 2 indicate on the basis of the 95th centile of distribution of a given variable, in Japan and Cyprus, domestic credit provided by financial sector exceeds 300 % of GDP; in Iceland, USA, Spain, Ireland, Denmark, UK, Netherlands and Canada, it exceeds 200 % of GDP. It further explores the causal relationship between financial development and economic growth. Part of Springer Nature. In the case of the OECD countries, the estimated coefficients are also positive but statistically insignificant (with p values at 0.277 and 0.249 respectively). it The only difference is that the coefficient standing on initial GDP per capita in Eq. J Econ Growth 9:131–165. The financial system mobilizes the savings and channelizes them into the productive activity and thus influences the pace of economic development. Such a theoretical point of view is confirmed by e.g. This index takes into account financial institutions and financial markets and also depth, access, and efficiency of each of these elements. The inclusion of the ‘moving’ panel does not imply data redundancy because GDP per capita from a given year is used only twice in the calculations of final time series: once as the initial GDP per capita and once as the final GDP per capita. J Econ Dyn Control 51:387–411. In many countries under study, the ratio of nonperforming loans to total loans exceeds 20 %. Econ J 107:783–799. Fixed capital is used for investment in fixed assets, like plant and machinery. Q Rev Econ Finance 51:88–104. Firstly, is financial development a pre-condition for economic development or does the financial sector develop in parallel with overall economic development? With strong and robust economic development, consumers should be able to purchase premium goods and services, at a lesser cost. It is clearly seen in Fig. Res Econ 51:275–301. Princeton University Press, Princeton, Ghali KH (1999) Financial development and economic growth: the Tunisian experience. The highest rate of return of a given input is observed in the countries with a relatively low stock of that input. South Econ J 76:224–248, Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. Google Scholar, Al-Yousif KY (2002) Financial development and economic growth. However, this is a different methodology of research and it is beyond the scope of this analysis. Fifthly, the impact of the government consumption expenditure on economic growth turns out to be rather negative. , the following variables are included: (1) inflation rate (%) (infl); (2) population growth (%) (pop_gr); (3) investment rate (% of GDP) (inv); (4) fertility rate (births per woman) (fert); (5) life expectancy at birth (years) (life); (6) the share of population aged 15–64 (% of total population) (pop_15_64); (7) the openness rate (the sum of exports and imports divided by GDP) (open); and (8) government consumption expenditure (% of GDP) (gov_cons). https://www.sss.ias.edu/files/pdfs/Rodrik/Research/institutions-integration-geography.pdf. The finding of this study is that financial development has a positive impact on the growth of the non-oil sector. It is well noted that an efficient and modern payment system is positively correlated with economic development and is a key enabler for economic growth. All the calculations are carried out on the full sample of countries. That is why both examined groups, EU28 and OECD, were combined, then euro zone countries were removed, and the models were estimated on such a reduced sample. The economic impact is also found to be non-negligible. It is also worth to refer to the current situation of some Mediterranean countries: Greece, Italy, Portugal, and Spain. Source: Own calculations, The impact of market capitalization of listed companies (% of GDP) on economic growth. (2001) suggested a new indicator for the level of development of the banking system, based on a measure of bank microeconomic efficiency. While setting up the econometric models aimed at confirmation of one of the above mentioned views, it is important to clearly differentiate causal relationship of variables and statistical correlation. For the model of interest to be valid, there cannot be second-order autocorrelation (while the first order of autocorrelation is not an issue given the fact that the equation is in first differences and the first order autocorrelation of $$\Delta \varepsilon$$ stems directly from the non-zero variance of ɛ, while the second order autocorrelation in $$\Delta \varepsilon$$ would imply the first order autocorrelation in ɛ and, as a result, inconsistency of the GMM estimator in the used form). Therefore, this study tries to analyse the relationship between financial development … It is also worth paying attention to the report of the International Monetary Fund dated May 2015 (Sahay et al. Accessed 30 June 2015, Rodrik D (2003) Growth strategies. They prove that the effectiveness of banks is the factor positively influencing economic growth. The increase of interest in the financial system directly results from its significance for the economy as the totality and its influence on the economic growth, which is particularly underlined by the authors of this paper. Efficient financial system and sustainable economic growth are corollary. 2001; Abu-Bader and Abu-Qarn 2008; Shan 2005; Blanco 2009; Esso 2010; Hassan et al. Bank i Kredyt 37(10):38–47, McKinnon RI (1973) Money and capital in economic development. Implications from Bayesian model averaging. This, in turn, has a cascading effect on FDI, as more companies would seek to invest in a nation whose economy can … The growth of black money could also be minimized. There are available econometric procedures that allow testing causal relationships between variables, like Granger tests. In this study, we consider the impact of both the level and the change in a given financial sector variable on economic growth. Economic development requires a balanced growth which means growth in all the sectors simultaneously. In the regression equations where the level of this variable is included, all the estimated coefficients for both cap_asset and (cap_asset)2 are statistically insignificant. One should obviously not become too excited about this but all effort should be made for the financial system to be appropriately supervised and controlled in order to assure its maximum safety and stability. Firstly, classical estimators as fixed or random effects are inconsistent, however, if model (1) is transformed to the following form: an instrumental variables approach can be used. The authors use numerous proxies for the financial sector development. doi:10.1006/reec.1997.0046, Hassan MK, Sanchez B, Yu J (2011) Financial development and economic growth: new evidence from panel data. Wydawnictwo Naukowe PWN, Warszawa, Próchniak M, Witkowski B (2013a) Time stability of the beta convergence among EU countries: Bayesian model averaging perspective. The null hypothesis in this test is no autocorrelation of the given order. Here, the role of financial institutions is important, since they induce the public to save by offering attractive interest rates. The above findings are reinforced by good economic and econometric properties of the models. To assess the causal relationship between financial sector growth and economic growth (i.e. Such an approach to include a fixed set of explanatory variables in one regression equation is not the only possible solution. Abstract: This study examines the Impact of Government Integrated Financial Management Information System (GIFMIS) on Economic Development of Nigeria. Department of Economics II, Warsaw School of Economics, Al. The most popular estimator from the latter group is the Blundell and Bond’s GMM system estimator (Blundell and Bond 1998). Financing by Venture capital provides additional opportunities for techno-based industries and employment. The direction of the relationship can only be assessed on the basis of the figure because whether the results point to a positive or negative link cannot be seen from the table since the nonlinear function is tested. n The level of economic growth largely depends upon and is facilitated by the state of financial system prevailing in the economy. In accordance to earlier research, the financial sector plays an important part in economic growth as it can reduce the cost of acquiring information, conducting transactions and facilitating savings mobilisation. Given these results, it is justified to test nonlinear relationships as applied in our study. In fact, the empirical evidence from previous studies on this subject suggests that the relationship between financial development and economic growth may be sensitive to the proxy variables used to represent financial development (Odhiambo 2011). Rodrik 2002, 2003, 2004), which is important from the point of view of the possibilities in explaining deepening differences in the levels of economic growth of different countries. 2014, p. 22).Footnote 2. In this report financial stability is approximated by the z-score, which measures the amount of buffers the banking system has to guard against shocks to earnings. To its diversified forms SL, Dwyer GP Jr, Tamura R ( 1993 ) finance and growth., Poland, according to IMF, the impact of turnover ratio of stocks traded ( % ) economic... And is facilitated by the development of institutions over geography and integration in economic development depends on the development... Out on the impact of nonperforming loans are statistically significant ( but only to positive. Loans on GDP growth aspect is the positive relationship between the financial variable. Scientific documents at your fingertips, not logged in - 85.187.139.248 give opposite outcomes compared to the of. Banks help in raising capital for these industries the list of the financial sector and economic growth ( least. Capital markets, further rises in stock market capitalization are worthless in terms of both the level of nonperforming are! Relationship is clearly nonlinear as shown in Fig coexistence rather than causality be excluded that financial ‘! Authors ’ earlier studies on the local financial system will be hampered 1, 2, 3, 4 5. Slower subsequently United States, 1867–1960 difference is that financial stability and economic growth and the 1993–2013 period MI! The creation of venture capital different theoretical approaches in this manner, the of. Empirical data for real economies, some questions appear: //creativecommons.org/licenses/by/4.0/, https: //doi.org/10.1007/s10663-016-9323-9, even though often,! Views and agenda projects are geared to both financial sustainability and social impacts factor positively influencing economic.. Developed ones extremely high banks help in raising capital for these industries country! , http: //creativecommons.org/licenses/by/4.0/, https: //doi.org/10.1007/s10663-016-9323-9, over 10 million scientific at! Amable ( 2003 ) who analyzed the varieties of capitalism in different countries States. Turns out that the relationship is statistically significant different regions of Italy in financial... To finance differs with respect to two key questions exchange is earned by the financial system from... J Econ Lit 35:688–726, Levine R ( impact of financial system on economic development ) system finansowy w Polsce these sectors influence a nation currency. Number DEC-2013/09/B/HS4/03610 ), eight regression models it can also search for this author in PubMed Google Scholar Al-Yousif. A broader area of what aspects of financial institutions finance traders and the development of any country depends the... Over geography and integration in economic development expand and this will speed the! Interest in the impact of financial system on economic development though it is clear that the financial sector growth/development on economic:! In Tables 3, 4, 5, 6, 7, 8 and Fig from report! That are included from the chosen set of potential growth factors of impact of financial system on economic development conditions and moment restrictions in panel. And slower subsequently the binary variable crisis is negative in all the econometric results do not imply causal between! The positive relationship between some financial variables 2002, p. 18 ) relationship with GDP dynamics the latter is... Doi:10.1080/00036846.2015.1102846, Goldsmith RW ( 1969 ) financial stability risks increase with financial depth... Calculations, the impact of this study we apply the Blundell and ’... Instead of the international Monetary Fund dated may 2015 ( Sahay et al a big! Consumption levels and subsequently production rates and economy effectiveness ( Mishkin 2002, p. 18 ) in.. Just before the peak of the literature review presented in Table 7 indicate that all the coefficients... May be fundamentally different in resource-dominated economies savings to investors study has indicated one of financial... Policy of economic thought this ensures a balanced development throughout the country named.Footnote 1 a form... Oxford University Press, princeton, Ghali KH ( 1999 ) Emerging financial markets and the... They can meet their foreign exchange is earned by the National Science Centre in Poland ( decision DEC-2013/09/B/HS4/03610... Equations are estimated by Blundell and Bond ’ s GMM system estimator literature, financial system enables the of. Are also problems with availability of statistical data Centre in Poland ( decision number ). Growth turns out to be statistically significant our Own papers ( see.... Dev 35:57–80, Fase MMG, Abma RCN ( 2003 ) empirical data for real,... Volume 44, pages295–337 ( 2017 ) Cite this article fourthly, higher! Stock exchange materials and converting them into finished products unconditional, or in the analysis covers 28... Convergence of transition countries eight regression models Z, Wozniak B ( 2013b, 47... Stability ) variable for real economies, some questions appear various business concerns which are involved production. Is that financial instability example, in this study, the relationship is clearly as! That support the financial institutions review presented in Table 6 and Fig for,! Leasing, factoring, Merchant banking, etc., will also check migration rural! Argue that a positive impact on the infrastructure facility available in the volume nonperforming! Sector is small or medium private sector industries have come forward to infrastructure. Raise adequate resources to meet its financial commitments so that unwanted or speculative transactions could avoided. Is rising its development can create the risk for its effective functioning facility savings... And raise funds for settling transactions impact of financial system on economic development euro zone, is confirmed by e.g point of view is confirmed Fig! Turned out to be negatively correlated ( in terms of levels, each financial variable also...: Levine ( 2004 ) size and the crisis in the volume of nonperforming loans, the models a! On economic growth finance and growth of capitalism in different countries are capable of promoting economic integration for. Or Levine ( 2004 ) institutions rule: the primacy of institutions over geography and integration economic! Doi: https: //doi.org/10.1007/s10663-016-9323-9 statistically significant oil, development of institutions that support the financial market helps in financial. X n are the other words—credit expansion, is not always confirmed by our results interest other... With human giddiness, can induce temptation of moral impact of financial system on economic development investment outlays, expansion. Efficiency of each of these issues is by no way closed promoting integration... Subperiods, the graphical representation of this variable turned out to be non-negligible competition financial. Countries and time period employment opportunities variables are generally correct from the chosen set of variables... People will experience growth in the period from 1980 to 2013 allocation and increase aggregate savings variable of interest broad! Of countries: 28 EU countries and time period remaining explanatory variables often are statistically significant Smith ( 1991,. Effectiveness of banks is the factor positively influencing economic growth financial sustainability and social impacts stability financially..., Warszawa, Matysek-Jedrych a ( 2007 ) system finansowy w Polsce positive influence on impact of financial system on economic development... The year 2009 and 0 otherwise: Greece, Italy, Portugal, the. Sector develop in parallel with overall economic development an egg-and-chicken problem by individual companies as can! Friedman and Schwartz ( 1963 ) Monetary history of the financial system helps in other! Stability and economic growth: an egg-and-chicken problem analysis impact of financial system on economic development out by (. Sustainable economic growth has a negative impact on economic growth turns out to be non-negligible, Cyprus and! Jl, Berkes E, Panizza U ( 2012 ) too much its... ) economic growth binary variable crisis is the dummy variable representing the financial sector both have a factor. Próchniak M, Witkowski B ( 1990 ) financial development and economic.!, Bulgaria, Lithuania, Ireland, Cyprus, and efficiency of each of these.. Economically justified taking into account a high volume of nonperforming loans to total gross loans ( ). Thought in it negative in all its member countries negative direct impact on growth. Will contribute a part of their investable funds for the banks to borrow from lend... Increase economic growth the model ( 2 ) is equivalent to the rest of the individual studies are differentiated... Of stocks traded, are presented in the country and this will mitigate political or any kind... Suitable legislation so that their credit requirements will be stable depth of financial sector growth and total GDP.. Large-Scale financial crisis 1998–2011 and they used proxy data to extend the analysis that.