In economics, the effects of developing financial markets on economic growth have always been an important issue in ever since. In international literature, although many studies have been done since 1900s to observe the relation between financial developing and economic growth, each study had found meaningful results only for its own period. Even though economists have accepted effects of financial developing on economic growth, they have not had the same idea about the direction of causality, which means whether financial development causes economic growth or economic growth causes financial development. For instance, Hicks (1969) and Schumpeter (1912) support that financial developing cause financial growth. In contrast to this opinion, Robinson (1952) discusses that in the existence of same type of financial regulations, economic growth creates a demand and financial system gives an automatic response to this demand which causes financial system development (Levine,1997).
According to some economists, financial developing does not explain economic growth well. Moreover, this relationship is a result of weak and unpowerful effect of financial system on economic growth. However, some economists, this relationship is a result of economies, which completed their development cycle in financial markets with a strong financial system, have bigger growth rate.
Developments in financial systems depend on the transfer rate of created sources from new savings to efficient fields and investments. In other words, developments depend on meeting the responsibilities of financial systems completely.
If the development of financial system affects economic growth positively, large financial deepening (development) rate will make economic growth increase. When this rate is small, since the financial deepening is weak, economic growth will not be at required level. Thus, how economic growth is affected from financial development or financial system is an important point for discussion.
In literature, McKinnon (1973) and Shaw (1973) supports that when financial repression is destroyed and financial system is liberalized, financial deepening will exist and then economic growth will increase. Same idea is followed by Fry (1995), Gablis (1997), Kapur (1976), and Mathieson (1980). In contrast to McKinnon and Shaw s view, Buffy (1984), Taylor (1983) and Van Wijnbergen (1983) who are called structuralist were developed alternative idea. According to them, financial development (deepening) decreases total real credit supply and prevents economic growth. According to Buffy (1984), if we give permission to reactions in markets then financial liberalization will be a dangerous enterprise. The other view, which is supported by Patrick (1966), financial deepening is very important for economic growth but this importance changes with growing. When real growth process occurs, supply which is a motive power of financial deepening will be less important and then demand will be dominant Patrick (1966).
This study is constituted by three parts. In the first part, general information about financial development, economic growth, financial deepening and its indicators, financial liberalization and financial repression is explained. In the second part, causal relationship between financial development and economic growth and literature review are provided. In the last part, granger causality test takes place and some evaluations and suggestions are in conclusion.
CONTENTS
INTRODUCTION
PART I
1. INSTITUTIONAL VIEW TO ECONOMIC GROWTH, DEVELOPMENT AND FINANCIAL DEEPENING
1.1. ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT : A GLOBAL PERSPECTIVE
1.2. FINANCIAL DEVELOPMENT
1.2.1. Measures and Indicators of Financial Development 8
1.3. THE THEORIES RELATED TO FINANCIAL DEVELOPMENT
1.3.1. Financial Liberalization Theory 8
1.3.2. Financial Repression Theory 9
PART II
2. THE RELATION BETWEEN FINANCIAL DEVELOPMENT AND ECONOMIC 10 GROWTH
2.1. THE CAUSAL RELATIONSHIP BETWEEN FINANCIAL 10 DEVELOPMENT AND ECONOMIC GROWTH
2.2. LITERATURE REVIEW 11
PART III
3. APPLICATION
3.1. DATA AND METHODOLOGY 13
3.2. UNIT ROOT TEST
3.2.1. ADF Test (Augmented Dickey Fuller Test) 13
3.3. COINTEGRATION METHODOLOGY 15
3.3.1. Johansen Co-integration Test 15
3.4. GRANGER CAUSALITY TEST
CONCLUSION 21
REFERENCES
APPENDIX
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