Asian Research Thesis Index

Abstract

This study finds the effect of stock market and banking sector development on economic growth considering 87 countries from low, medium, high and very high human developed groups using definition of Human Development Report of UNDP (2013). This study covers sample period from 1989 to 2013 and applies five types of unit root tests such as LLC, Breitung, IPS, Fisher ADF and Fisher Phillip Perron unit root tests both at level and at first difference using only intercept configuration for all the four groups and results provided evidence of mixed order of integration. This study further uses Kao, Pedroni and Westerlund cointegration techniques to find long run relationship and results confirmed long run relationship between economic growth and its factors such as stock market and banking sector development along with inflation, remittances and internal migration. This study employs mean group, common mean group and augmented mean group to find long run impact of stock market and banking sector development on economic growth and to capture speed of adjustment of all the long run models for each group, error correction specification will be used. The empirical results demonstrate that stock market development in the form of market capitalization leaves significant effect on economic growth only in very high human developed countries in case when it is regressed with broad money supply (proxy for banking sector development) whereas broad money supply leaves negative and significant effect on economic growth in low, medium and high human developed countries. However, both market capitalization and credit to private sector (proxy for banking sector development) leave negative and significant effect on economic growth in medium and high human developed countries but, credit to private sector leaves positive and significant effect on economic growth in low and very high human developed countries. Moreover, market capitalization also significantly enhances economic growth in very high human developed countries. The interaction term between market capitalization and domestic credit to private sector provide evidence of complementarity between stock market development in the form of market capitalization and banking sector development in the form of domestic credit to private sector in all the four groups. This shows that both sectors are together required to elevate the pace of economic growth in all the four groups. The results further exposed that stock market development in the form of traded stocks significantly increase economic growth in medium and very high human developed countries in case when we regressed traded stocks with broad money supply (proxy for banking sector development). We found negative and significant effect of broad money supply on economic growth in low, medium and high human developed countries. But, traded stocks left positive and significant effect on economic growth in low and medium human developed countries in case when we took it with credit to private sector (proxy for banking sector development) and the effect of credit to private sector is significantly positive on economic growth only in low human developed countries whereas its effect is significantly negative on economic growth in medium and very high human developed countries. The cross product term between traded stocks and domestic credit to private sector confirms the complementary effect between stock market development in the form of traded stocks and banking sector development in the form of domestic credit to private sector in low, medium and high human developed countries. This demonstrates that both sectors reinforce each other to enhance economic growth. Moreover, the findings also show that stock market development in the form of turnover ratio leaves negative and significant effect on economic growth in high human developed countries but, it leaves positive and significant effect on economic growth in very high human developed countries in case when it is regressed with broad money supply (proxy for banking sector development). The effect of broad money supply is found to be negative and significant in case of medium human developed countries. The findings further show that turnover ratio is significantly increasing economic growth in low and very high human developed countries in case when we regressed it with credit to private sector (proxy for banking sector development) but, credit to private sector is also significantly increasing economic growth in low, high and very high human developed countries. This study confirms the evidence of complementary effect between stock market development in the form of turnover ratio and banking sector development in the form of domestic credit to private sector in low and high human developed countries. This concludes that both sectors will help in promoting economic growth in low and high human developed countries. This study also tests convergence hypothesis which reveals speed of adjustment to achieve stable equilibrium in response to any macroeconomic shock. The findings confirmed that coefficient of first period lagged term in all the models for all four groups (low, medium, high and very human developed countries) is negative and significant which provides evidence of convergence hypothesis for all the groups. Keeping in mind the proxies of stock market, it is witnessed from the findings that market capitalization appears as most robust factor to stimulate economic growth in all the four groups relative to stock traded and turnover ratio in case when it interacts with domestic credit to private sector. This study proposes that in the sequence of reforms, reforms related to market capitalization may be given more importance to promote economic growth in all the four groups.

Add/Update Thesis