The Long Run Causality Direction Between Financial Markets Development And Economic Growth

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This thesis investigates the long-run causality direction between financial markets development and economic growth in Croatia, Slovenia, Serbia and China for varying time periods using VAR models and Granger Causality methods. It also explores the interrelationships between variables using the Impulse Response Function. Financial industry consists of two main parts; debt and equity (Krugman and Obstfeld, 2009). These are also called debt and equity markets. Credit markets which are primarily consisted of banks are assumed to provide lending and saving channels for potential individual, private and public investors. Stock markets are the other crucial part of the financial system. These capital markets provide equity and direct form of…show more content…
This type of growth model is called an exogenous growth model since it assumes that technological progress is exogenous. This is the main reason why it can poorly describe the works of economic forces and government policies. For that reason factors like financial development cannot influence the rate of economic growth, but only the equilibrium level of capital stock per worker.
From this came the need for another type of growth model. It came in a form of „endogenous growth theory“which began developing in middle of 1980s. This type of growth models determine long-term growth rates by focusing on economic growth, as an endogenous result of an economic system. Romer (1986), Lucas (1988) and Rebelo (1991) were the pioneers of this approach in modeling economic growth. Arrow (1962) in his work developed a model where capital accumulation did not generate diminishing returns like in the neo-classical models before. Instead knowledge spillovers were limiting the effect of diminishing returns trough positive spillover effect across producers. Romer (1986) was the first to incorporate these types of spillovers in a framework.
Main assumption of new „endogenous growth theory“was that marginal productivity of capital does not converge to zero as capital per worker grows. So even if exogenous productivity growth is absent, the endogenous aspect of growth of per capita output is
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