Extrapolating this division into financial sector, inputs are the institutional factors (like banking sector or capital market regulation) that have an impact on the stability and development of the financial sector. Financial system promotes capital market. Empirica doi:10.1016/0304-3878(96)00006-5, Odedokun MO (1999) How the size of the monetary sector affects economic growth: econometric evidence from industrial and developing countries. The cited study refers to the sample of post-socialist countries; however, in the case of many variables the results are similar in the other authors’ studies where BMA model was applied to the EU countries (see e.g. Appl Econ. Although the view may not be universal, it is widely believed that financial system development boosts economic activities in an economy which leads to economic growth. Niepodleglosci 162, 02-554, Warsaw, Poland, You can also search for this author in Our results indicate that all the research hypotheses have been positively verified. Studies excessive lending or too high volume of nonperforming loans, has a negative impact on GDP growth. doi:10.1016/j.qref.2010.09.001, Ireland PN (1994) Money and growth: an alternative approach. The best part of the financial system is that the seller or the buyer do not meet each other and the documents are negotiated through the bank. 2001; Abu-Bader and Abu-Qarn 2008; Shan 2005; Blanco 2009; Esso 2010; Hassan et al. 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. It means that banking sector development is significantly influenced by economic growth. From the other side too much finance can lead to a diversion of talent and human capital away from productive sectors and toward the financial sector. The economic impact has already been between $160 billion (5.6 percent of GDP)and$175 billion (6.0 percent of GDP). Although the development of financial system is important for economic growth, it is still underdeveloped in economically backward countries, the low-income countries (LICs). As regards economic fit, the signs of the estimated parameters for the other control variables are generally in line with the economic theory. For example, after a certain critical point interest on the excessive level of debt is very high and a lot of resources are devoted for repaying debt. Taking into account the above problems, in this study we apply the Blundell and Bond’s GMM system estimator. J Econ Dev 35:57–80, Fase MMG, Abma RCN (2003) Financial environment and economic growth in selected Asian countries. 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. There are available econometric procedures that allow testing causal relationships between variables, like Granger tests. Hence, the higher the level of nonperforming loans results in the slower growth rate of output. 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). An efficient and effective banking system and financial markets create a positive impact on the overall wealth of society, by enabling the advantageous flow of financial means accessibility in any given time. While working capital is used for the day-to-day running of business. The respective columns in the table indicate the variables which are used to measure financial sector development, the sample of countries and time period, and the main authors’ conclusions. The FD Index for Poland, according to the data from this report, accounts for 0.5 points. H0: Financial sector growth/ development have a significant impact on economic growth in The inclusion of initial GDP per capita allows us to verify the existence of conditional β convergence hypothesis (β convergence takes place if less developed countries grow faster than more developed ones; the process is conditional because the regression equation includes also the other factors of economic growth that affect the steady-states of the individual countries). The estimated coefficients for the variable Δcred_by_fin are positive and statistically significantly different than zero (assuming a 5 % significance level) in estimated regression equations both for 3- and 5-year data. In the BMA model with five control factors ($$\bar{s} = 5$$ in the cited paper), inflation, investment, and openness rates as well as government consumption are statistically significant with p value of 0.000; population growth, fertility rate, and life expectancy are statistically significant at the 10-percent significance level; population aged 15–64 is statistically significant at the 15-percent significance level. With more capital, investment will expand and this will speed up the economic development of a country. (2004, p. 19). Source: Own calculations, The impact of market capitalization of listed companies (% of GDP) on economic growth. One group is characterized by the structural-institutional approach, in the other though it is functional approach. According to the authors, the efficiency of investment (not its volume) is the main channel of transmission from financial development to growth. Brookings Institution, Washington, Mishkin FS (2002) Ekonomika pieniądza, bankowości i rynków finansowych (przekład A. Minkiewicz). Financial sector projects are geared to both financial sustainability and social impacts. 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. An efficient financial system is one of the foundations for building sustained economic growth and an open, vibrant economic system. The growth of trade in the country also induces employment opportunities. Taking into account the multitude of financial system definitions, the discussion should be started with an explanation of how different authors understand this term. J Asian Econ 9:503–517. Governments worldwide also greatly impact of the economy by making laws, having taxes and controlling the flow of money etc. A special emphasis is placed on the impact of the global crisis. In summation, the results for this and the former variable show that the development of the stock exchange has a positive impact on economic growth but only until a certain point: too excessive size of capital market is not conducive to GDP growth (and may even hamper it). 2000, Uturu, Nigeria; dreugeneiheanacho@gmail.com; Tel. The benchmark period was 1998–2011 and they used proxy data to extend the analysis from 1960. The MIT Press, Cambridge, Bencivenga VR, Smith BD (1991) Financial intermediation and endogenous growth. In the case of EU countries, the coefficient of the variable (nonp_loans)2 is also statistically significant with p value not exceeding 0.001 for both 3- and 5-year data pointing to a nonlinear relationship. 5 finish just before the peak of the parabola. Anyway, all the estimated models show a negative impact of nonperforming loans on GDP growth. The money market which is a part of financial system, provides working capital to the businessmen and manufacturers due to which production increases, resulting in generating more employment opportunities. World Dev 27:1069–1082. 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. © 2021 Springer Nature Switzerland AG. Researchers have not identified the positive correlation between the size of the financial sector and economic growth in the case of countries with very large financial sector presence. Here, the role of financial institutions is important, since they induce the public to save by offering attractive interest rates. It suggests that the argument by bank lobbies, i.e. In these countries, the development of capital market is an important economic growth determinant and leads to a faster output growth. Economic development of any country depends on the infrastructure facility available in the country. that regulating the size and growth of the financial sector would negatively impact economic growth, is not supported by the EU data. Here, the role of financial institutions is important, … NBER Working Paper 7448, Rousseau PL, Sylla R (2001) Financial systems, economic growth, and globalization. The budgetary gap is filled only with the help of government securities market. It will also check migration of rural population towards towns and cities. Thanks for helping us if we are students For a long time, infrastructure industries were started only by the government in India. https://www.sss.ias.edu/files/pdfs/Rodrik/Research/institutions-integration-geography.pdf. As a result of all these, the growth of the country is speeded up. The theoretical structural model suggests that the impact of this variable on GDP growth should be negative. The development of any country depends on the economic growth the country achieves over a period of time. Accessed 5 July 2015, Odedokun MO (1996) Alternative econometric approaches for analysing the role of the financial sector in economic growth: time-series evidence from LDCs. The market also provides opportunities for the banks to invest their short term idle funds to earn profits. 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. The authors also state that financial deepening is rapid before the creation of a stock exchange and slower subsequently. The tables present estimates of the regression coefficients along with p values (to assess statistical significance), the results of testing first- and second-order autocorrelation, as well as basic information about the sample (including the number of observations, the number of countries, and time period). Nigeria. The study covers the 1993–2013 period and two groups of countries: 28 EU countries and 34 OECD economies. However, the estimated coefficient standing for the variable Δcap_asset is statistically significant (at 15 % significance level) in all the four models but the sign of the coefficient is unexpectedly negative. Implications from Bayesian model averaging. 2014, p. 22).Footnote 2. The political conditions in all the countries with a developed financial system will be stable. Yale University Press, New Haven, Graff M (2002) Causal links between financial activity and economic growth: empirical evidence from a cross-country analysis, 1970–1990. Such an approach is more robust to the omitted variables’ error as it is possible to include more explanatory variables in the analysis. According to this view, the presence of financial middlemen supports the economic growth through the increase of effectiveness of capital accumulation and marginal productivity resulting from it (Goldsmith 1969) and through the increase of the savings rate (McKinnon 1973; Shaw 1973). The above findings are reinforced by good economic and econometric properties of the models. J Polit Econ 98:1076–1107, Greenwood J, Smith BD (1997) Financial markets in development, and the development of financial markets. It is here that the financial services play a crucial role by providing funds for the growth of infrastructure industries. This ensures a balanced development throughout the country and this will mitigate political or any other kind of disturbances in the country. Abu-Bader S, Abu-Qarn AS (2008) Financial development and economic growth: empirical evidence from six MENA countries. Opportunities for techno-based industries and employment the real economy 00928-0, Hansson P, Jonung L ( 1997 ) systems. This study examines the impact of bank nonperforming loans to total gross loans ( % GDP. Better-Developed financial systems, economic growth and reduce poverty, consumers should be.! Is observed in the countries with well-developed capital markets can be found in: J. First of all, the more effective allocation of resources in conditions uncertainty. Overcoming “ costs ” incurred in the literature the parabola Res 54:119–133, Greenwood and Jovanovic ( 1990 ) Levine... In nonperforming loans, has a direct impact on economic growth accelerates relative to the fact that some (! Exchange increase economic growth: the case of levels ) with economic growth et.! 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