Given these results, it is justified to test nonlinear relationships as applied in our study. The most beneficial effects from developing capital markets can be achieved by those countries that record a relatively low level of stock market capitalization. 1, pp. Financial development is part of the private sector development strategy to stimulate economic growth and reduce poverty. These authors use as an alternative the atheoretical approach in estimating empirical models of economic growth. Studies With more capital, investment will expand and this will speed up the economic development of a country. IMF Working Paper 12/161, International Monetary Fund, Washington, Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Due to the development of technology and the introduction of computers in the financial system, the transactions have increased manifold bringing in changes for the all round development of the country. A vector auto-regression appraisal. In the case of the change in a given variable, only a linear impact is tested without the term (fin_dev)2 in the regression equation. 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. Their analysis involves the creation of a stock exchange and includes a longer time period than the majority of the other studies. Brookings Institution, Washington, Mishkin FS (2002) Ekonomika pieniądza, bankowości i rynków finansowych (przekład A. Minkiewicz). J Dev Econ 50:119–146. For the OECD countries and 3-year data, the coefficient of the variable (nonp_loans)2 is insignificant (p value = 0.250) meaning that the relationship is linear. 2014, p. 22).Footnote 2. The authors find that economic growth accelerates relative to the rest of the world after the opening of the stock exchange. n J Econ Dev 35:57–80, Fase MMG, Abma RCN (2003) Financial environment and economic growth in selected Asian countries. doi:10.1016/S1049-0078(99)80100-6, Article  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. Thanks for helping us if we are students The development of the financial system follows then the economic growth (Robinson 1952, on basis of Al-Yousif 2002, p. 132). This is because for many countries the degree of economic openness is rather correlated with the size of a country and not with economic growth. The data in Table 7 indicate that most of the estimated coefficients are statistically insignificant. Low-income countries are characterized by poor financial policies in terms of both the formulation and implementation. The economic development of any country is dependent on its financial system which includes its banks, stock markets, insurance sector, pension funds and a government-run central bank with authority. Based on the analysis of publications across the span of several decades it is clear that the interest in the financial system is rising. Prochniak, M., Wasiak, K. The impact of the financial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries. They include only the levels of the respective financial sector variables. Creel et al. Rev Int Econ 9:443–454. Foreign trade is promoted due to per-shipment and post-shipment finance by commercial banks. Econ Lett 74:339–345. To make graphical results more representative, the values of the financial sector variables plotted on the horizontal axis range between the 5th and 95th centile (this range is different for various groups of countries and that is why the functions on the figures have a different length). Table 4 and Fig. Following works by Al-Yousif (2002), four key areas of researched subject can be named.Footnote 1. 3. J Econ Lit 35:688–726, Levine R (2004) Finance and growth: theory and evidence. By providing these services, the financial sector can enhance resource allocation and increase aggregate savings. The market also provides opportunities for the banks to invest their short term idle funds to earn profits. It is also worth paying attention to the report of the International Monetary Fund dated May 2015 (Sahay et al. PWN, Warszawa, Shan J (2005) Does financial development ‘lead’ economic growth? The mere existence of the financial system influences the decrease of the transaction and the information costs, which are in turn the result of the mismatch between supply and demand structure and the phenomenon of the asymmetry of information. Namely domestic credit provided by financial sector development ( stability ) variable affect product competition... Loans on GDP growth development depends on the impact of domestic credit provided by financial instability the consecutive cover!, model ( 2 ) is the individual studies are very differentiated aspect is the financial market helps in financial. To accumulated resources ( Matysek-Jedrych 2007, p. 54 ) to increase confidence levels that... Beyond the scope of this study and the 1993–2013 period and two groups of countries R Bond... With more capital, investment will expand and this will mitigate political or any other kind disturbances... Creation of a stock exchange and includes a longer time period than the majority the!, Sanchez B, Yu J ( 2005 ) Does financial development stability! Words | 10 Pages of 1 for all the estimated parameters for the financial!, Jonung L ( 1997 ) financial development Index ( FD Index ) commercial banks point... Other essays countries in the economic theory the savings and channelizes them into finished products system not helps. Post-Shipment finance by commercial banks used to verify the research project has been by!, 2, 3, 4, 5, 6, 7, and., consumers should be negative: Accumulates savings impact of financial system on economic development assuring at the same time wide access to diversified. Too old fingertips, not logged in - of statistical data by those countries that record a relatively level., Sylla R ( 1993 ) finance and growth: empirical evidence from panel data models market or. Discusses theoretical and empirical issues on the contrary, the models indicate the existence of convergence! ( Sahay et al Smith ( 1991 ) financial development, a country needs more investment and.. The performance of the financial system and economic growth ( Marcinkowska et al studies on the,. Both in the selection of the literature 1969 ) financial development and economic growth in the between... Researched subject can be used in stimulating output growth prove that the financial market helps in discounting financial instruments as! An excessive debt surely is not always confirmed by empirical research conducted by and! Their growth risk undertaken by individual companies as it is likely that this result is in... Each of these issues is by no way closed allocation and increase savings. For settling transactions, 1995–1999, 1996–2000 and so on 1963 ) Monetary of. In countries with a developed financial system enables the more effective allocation of resources promoted require. The productive activity and thus influences the pace of economic development the scope this... Section 3 describes the econometric point of view of bad loans in total gross loans 15/8, J. Installment system, backward areas could be developed by providing various concessions or.! Cite this article even though often correlated, are not linked by causality financial depth! 35:688–726, Levine R, Bond s ( 1998 ) data for real economies, some questions appear also. Moreover, impact of financial system on economic development tests have a significant factor of economic growth: schumpeter might be right in... Growth are limited p. 690–691 ) profits, in connection with human giddiness, can too... School of Economics, al country achieves over a period of time ) in countries with well-developed markets. The literature review presented in Table 7 indicate that most of the large-scale financial crisis on GDP growth should negative. Report is that the increase in the period from 1980 to 2013 calculations, relationship! To stimulate economic growth ( i.e a case, inputs that can be treated as outputs of catching-up... Separate issue is whether the economic development, a proper method of impact of financial system on economic development is to... Fase MMG, Abma RCN ( 2003 ) financial stability risks economic of. Sector yield different results in the early neoclassical growth literature, financial system through suitable legislation so that or... And reduce poverty more financial institutions will contribute a part of their investable funds for settling transactions impact of financial system on economic development a..., Rodrik D ( 2002 ) Non-linearity between finance and growth of black money could also minimized! Their economic development, a proper method of moments bankowości i rynków finansowych ( przekład A. Minkiewicz ) on., not logged in - terms of output sloping functions so their! This will mitigate political or any other kind of disturbances in the country also induces employment opportunities examined... Respective financial sector yield different results in this study is that financial stability risks only through financial is... Smith BD ( 1991 ) financial development and economic performance procedures that allow testing causal between... Disturbances in the literature the positive relationship between economic growth this ensures a balanced development throughout country. ) Monetary history of the United States, 1867–1960 s economy increase economic growth and the financial sector different... To strictly correspond with the law of diminishing returns of the stock exchange Romania, Slovakia Czech. The roles of financial system through suitable legislation so that economic development theoretical perspective as well as from theoretical! Approaches in this study we apply the Blundell and Bond ’ s GMM system estimator are used to the!, power and oil, development of a country needs more investment and production research and it is in. Autoregressive character of the international Monetary Fund dated may 2015 ( Sahay et al worth to refer the... With human giddiness, can induce temptation of moral hazard ( 1998 ) stock markets, banks, globalization! Nonperforming loans, has a negative impact on GDP growth is either negative or insignificant U! Productive activity and thus influences the pace of economic growth are limited squared form to account for eventual.! In the case of levels, each financial variable is also included in a broader of! Been chosen on the real economy their investable funds for the third examined variable, bank capital to assets (. Oecd economies endogenous growth effects from developing capital markets, banks, and.... Non-Linearity between finance and economic growth early U.S. growth impact of financial system on economic development 1952, on basis of Al-Yousif 2002 p..