Role Of Financial Development On Economic Growth

The crowding-out effect is the reduction in investment spending caused by the increase in interest rates arising from an increase in government spending, financed by borrowing. The increase in G was designed to increase AD,

The overall development of an economy is a major factor that has significant impacts on the development of the economy's financial markets. Since well-functioning financial systems offer good and easily accessible information, they lower the costs of transaction. This in turn enhances resource allocation and strengthens economic growth. The financial services industry consists of various systems such as stock markets and banking systems that enhance growth and help in poverty reduction. However, commercial banks tend to dominate the financial system during low levels of economic development while stock markets become more active and effective during periods of high levels of economic development ("Financial Sector", n.d.). The other important systems in the financial services industry include sound macroeconomic policies, shareholder protection, and good legal systems.

When the net worth of an agent falls, adverse selection and moral hazard problems increase in credit markets \citep{Boivin2010}. More specifically, contractionary monetary policy decreases the net worth of agents and firms, implying less collateral for the loans, and, consequently, increased losses due to the adverse selection. This again tends to cause more reluctant lenders, evident by their demand for higher risk premium or reducing the volume lent out, causing a decline in spending and aggregate demand (\citet{BernankeGertler89}; \citet{bernanke1999}). Beyond this asymmetric information problem, the lower net worth of firms devalue owners’ equity stake in their firms implying increased risk appetite. Again, this causes a decrease in the loan supply and thus a decrease in aggregate output. Furthermore, increased interest rates transmits into higher debt burden for loans with floating interest rates. The increase in interest rates suggests that the cash flow of firms and households weakens, leading to decreasing investments and

interest rate policies to the housing bubble, but only to an extent. But also there is evidence that the

economy. What happens to money and credit affects interest rates and the performance of the

The Government has spent $12.2 billion to assist households financially and support economic growth. The household stimulus package provides extensive support from low to middle-income earners

Economist Hyman Minsky created the financial instability hypothesis in response to the efficient market hypothesis that Keynes created in the 1970s. Keynes develop developed a basic theory of investment, crediting investment with being the “driving variable that operates through a multiplier to establish total income” (Wray, 2015, p. 4) Minsky looks to Keynes investment theory of the business cycle and as an extension, adds his financial theory of investment that allowed him to analyze the capital economy that exists today. Minsky thought that investment finance plays a large role in the economy and that it cannot be overlooked. He believes that government intervention is absolutely essential, as can be seen throughout history. Before Big Government and Big Banks, recessions in the economy were severe, frequent, and lengthy. Upon their introduction recession have become milder and less frequent. Central banks act as a lender of last resort. Policies were introduced to act as stabilizers and kept the economy from ever getting back to the point where it was during the great depression. (Rezende, 2015)

He showed how sudden injection of credit into economy could cause changes in the relative prices between goods and lead to overinvestment that cannot be maintained. "When money and credit vary, it sets up a train of events which draws resources into places where they would not normally go. In particular, an increase in credit stimulates investment" (Butler, 8). Thus, Hayek shows that it is a response to the false signal of new credit being created, and therefore this investment cannot be maintained.

In Asia, the economic growth has been phenomenal and the deepening of economic integration and larger trade volumes have led to both developed and developing nations to experience steady economic growth, especially at 10.1% in 2007 (ADB, 2015). Nevertheless, especially with China’s economic slowdown, the Asian region is facing problems such as decrease in labor force, labor productivity, and overall trade growth (ADB Report, 2015). In order to consolidate economic integration of the region, the ASEAN Economic Community (AEC) was implemented on December 31, 2015. The AEC is based on four pillars which are the following: a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy (ASEAN Secretariat, 2015). The establishment of the AEC creates opportunities of a huge market worth over USD 2.5 trillion while the region was the seventh largest economy in the world with a population of over 622 million people and the largest market base in the world behind only China and India (ASEAN Secretariat, 2015). Moreover, the ASEAN Economic Community can be viewed as a yardstick of ASEAN’s progress in building a more economically integrated regional organization. The AEC aims to create a single market and production base in achieving freer flow of goods, services, labor, and capital (ASEAN Secretariat, 2015). In doing so, tariff elimination alone cannot create an open market;

Economic growth and Economic Development is of the highest priority in regards to a well-functioning sovereign state. Economic growth powers an economy through the stability ensured by equilibrium in the circular flow of money accompanied by: growing international competitiveness in a globalised market, increase in real GDP through the appropriate allocation of resources most suited to the expansion of the economy, increase in aggregate demand and increased efficiency in the economy. Stagnation or prolonged contraction of an economy, identified by the disequilibrium in the circular flow of money, with leakages exceeding injections, and a growing Current Account Deficit (CAD), can lead to a fall in aggregate demand, wages and employment. With this fall also comes a fall in the Quality of Life as the aggregate propensity to spend contracts and Government assistance is more widely needed to meet daily needs.

Extensive amount of studies have been undertaken to examine the effect of stock market on GDP growth. Some of the studies on this topic are Demirguc-Kunt and Levine (1995), Levine and Zervos (1993, 1995, 1998) etc. In theory well developed stock market should enduce saving and efficiently allocate capital to productive investments which would later lead to increase in the rate of real output. Stock markets contribute to accumulation of domestic savings by enhancing the scope of financial instruments available to savers and investors trough diversification of their portfolios. Dailami and Aktin (1990) think stock markets provide important source of capital investment at low cost which should serve as an obvious benefit for the economy in general. In developed economies with developed stock markets share ownership provides individuals with probably the most liquid means of sharing the risks and benefits of investing in promising projects. The main advantage of liquid stock market is that it provides investors to cope with liquididy risk by allowing participants hit by illiquidity constraints to sell their stakes to othe participants who at the time do not suffer form the same problem. These transactions are done in real time with frictions in the market being at the minimum. The ending result of this process is that capital is not prematurely withdrawn form firms to meet short term liquidity need. It is just changing hands. Stock markets also play an important role in

This is the second Global Financial Development Report published by the World Bank. It seeks to contribute to enhancing the knowledge of financial inclusion around the world. In the recent times, financial inclusion has become an important aspect for economic and social development of an economy and has become a significant topic of discussion for the policy makers, market practitioners etc. Financial inclusion has been given a lot importance in our country and this can be proven by the recently launched ‘Pradhan Mantri Jan Dhan Yojana’ which aims to provide a bank account for every household. This report provides us with new data and research filling certain gaps in the knowledge of financial inclusion.

Historically, economic theories have suggested negative relationship between investment and interest rates. Changes in either nominal or real

One way to reduce inequality among countries is financing economic development in low and middle-income countries previously referred to as developing countries. Financing economic development in developing countries has always been of interest to me. Ending extreme poverty in countries by 2030 is a major goal of the World Bank and the United Nations. Ending poverty involves raising income and facilitating inclusive growth. Low and lower-middle income countries require foreign finance to bridge the gap between domestic savings and the fund required to finance development. Reallocating savings from countries with excess savings to countries with deficit savings is a way to provide foreign finance to low income countries. Reallocation of

This thesis explores the long run relationship between financial development and economic growth using time series modeling. For each of the four case-countries three types of Vector Autoregression (VAR) models will be developed except for the case of Serbia where only VAR related to credit institutions development will be developed since data related to stock market development indicators were unavailable to author. For the case of Croatia, Slovenia and China three separate VAR models will be applied. First, bivariate VAR model to explore the connection between credit institutions development and economic growth. Second, bivariate VAR model to explore the connection between stock markets development and economic growth. Third,