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The impact of financial development on economic growth

Author

Listed:
  • Najeb Masoud
  • Glenn Hardaker
Abstract
Purpose - The purpose of this paper is to provide a theoretical framework that integrates the endogenous growth and functions of financial markets and institutions theory in order to investigate how the financial market and the banking sector develop indicators that affect economic growth in these countries. Design/methodology/approach - This paper is an empirical analysis of the relationship between financial development and economic growth for 42 emerging markets, over 12 years, using endogenous growth model. Findings - First, the results suggest that stock market development has a significant effect on economic growth, and this effect remains strong even after the influence of banking sector and other control variables using a growth model. Second, the research findings largely support the view that there is a stable, long‐term equilibrium relationship between the evolution of the stock market and the evolution of the economy. Originality/value - The evidence supports the view that the relation between stock market development and economic growth in emerging economies is bi‐directional. The findings describe that the stock market and the banking sector in emerging economy are complementary rather than substitutes in providing financial services to the economy.

Suggested Citation

  • Najeb Masoud & Glenn Hardaker, 2012. "The impact of financial development on economic growth," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 29(3), pages 148-173, July.
    • Handle: RePEc:eme:sefpps:v:29:y:2012:i:3:p:148-173
    DOI: 10.1108/10867371211246830
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    4. Iqbal, Athar & Khan, Muhammad Irfan & Riaz, Samina, 2017. "The Causality between Equity Market Development and Economic Growth: An Egg and Chicken Problem?," MPRA Paper 103038, University Library of Munich, Germany, revised 30 Dec 2017.
    5. Sheilla Nyasha & Nicholas M. Odhiambo, 2017. "Are Banks and Stock Markets Complements Or Substitutes? Empirical Evidence from Three Countries," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 15(1 (Spring), pages 81-101.
    6. Sanjaya Kumar LENKA, 2015. "Does Financial Development Influence Economic Growth in India?," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(605), W), pages 159-170, Winter.
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    20. Jamshed Y. Uppal & Inayat U. Mangla, 2018. "Role of Financial Services in Economic Growth: Policy Implications for Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 23(2), pages 69-108, July-Dec.
    21. Constantin ANGHELACHE & Gabriela Victoria ANGHELACHE & Mirela PANAIT & Ihab Jweida SJ JWEIDA, 2016. "The Analysis of International Trade of Romania," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(12), pages 93-99, December.
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    23. Polat, Ali & Shahbaz, Muhammad & Ur Rehman, Ijaz & Satti, Saqlain Latif, 2013. "Revisiting Linkages between Financial Development, Trade Openness and Economic Growth in South Africa: Fresh Evidence from Combined Cointegration Test," MPRA Paper 51724, University Library of Munich, Germany, revised 25 Nov 2013.

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