Financial Development and Economic Growth: Evidence from China

9260 WordsMay 24, 201138 Pages
China Economic Review 17 (2006) 395 – 411 Financial development and economic growth: Evidence from China Qi LIANG a,b,*, Jian-Zhou TENG c,d b Department of Finance, School of Economics, Nankai University, Tianjin, 300071, China Graduate School of Commerce and Management, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan c Graduate School of Economics, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan d School of Mathematics and Statistics, Northeast Normal University, Changchun, 130024, China Received 17 April 2005; accepted 26 September 2005 a Abstract This paper investigates the relationship between financial development and economic growth for the case of China over the period 1952–2001. After considering…show more content…
By identifying the finance-growth nexus in a co-integrating framework through tests of over-identifying restrictions, Luintel and Khan find bi-directional causality between financial development and economic growth in all the sample countries. Christopoulos and Tsionas (2004) also investigate the long-run relationship between financial development and economic growth in a multivariate VAR framework, though the examination is carried out via panel unit root tests and panel co-integration analysis in a panel-based vector error correction model (VECM). For all the developing countries in their sample, Christopoulos and Tsionas find unidirectional causality from financial depth to growth. These two reviewed studies are subject to limitations such that the capital formation is the only additional growth-determining variable incorporated in the framework. Moreover, stock-flow problem inherent in the indicator measurement of financial development is not finely dealt with. Additionally, focusing exclusively on one country instead of a number of nations is advantageous in that the econometric findings can be related to the prevailing institutional structure (Bell & Rousseau, 2001), as Chandavarkar (1992, p. 134) argues that the relationship between finance and growth bmerits
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