Essays on financial development and economic performance
Creators: name: Li, Zhenxiong
Publisher: name: Lancaster University
Year: 2018

description: This thesis attempts to provide empirical evidence for the hotly debated
      relationship between financial development and economic performance using
      a variety of time series and panel data methods. Also, it extends the
      previous finance-growth literature by examining the role of democracy in
      the process. Three inter-related studies form the work undertaken.
      
      Chapter 2: In the first of these the impact of financial development on
      growth is investigated for the case of China using a range of time-series
      techniques. The results from this work - which spans almost five decades
      from 1952 - uncover a bi-directional causality between the country’s
      output performance and its financial development. Meanwhile, domestic
      financial development failed to promote China’s long-term economic
      performance over the period under investigation. These findings are
      inconsistent with the previous studies of Hao (2006) and Liang and Teng
      (2006). Here, the failure of financial development to stimulating the
      long-term growth is attributed to the issues of majority government
      ownership and the high volume of non-performing loans in the domestic
      financial system.
      
      Chapter 3: The relationship between domestic financial development and
      economic growth has been on the agenda of growth economics for a long
      time. Notwithstanding its hypothesized benefits certain studies have
      uncovered evidence of the detrimental effect of domestic financial
      development for the long-term growth prospects. Such findings highlighted
      the importance of institutional conditions of financial development. With
      a panel of 171 countries worldwide over the period 1960 to 2014, this
      study presents an examination of the question of whether the existence of
      sound democratic institutions is necessary for financial development to
      stimulate economic growth in these countries. The baseline results show
      that financial sector development per se has the capacity of exerting a
      significantly positive impact on domestic economic growth. However, little
      evidence of any significant effect of democracy on growth is observed.
      Meanwhile, the results suggest that the positive effect of financial
      development on economic growth does not require the condition of the
      existence of democratic institutions. The study conjectures that, for
      policymakers, improving the domestic financial system can contribute
      growth, even in the absence of sound democratic institutions.
      
      Chapter 4: This research provides a re-examination of the long-term effect
      of financial development on economic growth using annual data for 67
      countries from 1971 to 2007. Autoregressive distributed lag (ARDL) and
      cross-sectionally augmented autoregressive distributed lag (CS-ARDL)
      models have been applied to confront cross-country heterogeneity and error
      cross-country dependence. A positive and significant effect of financial
      development on the long-run per capita output is observed. Typically, such
      a beneficial impact is largely driven by nondemocratic countries. Also,
      some evidence of a nonlinear effect of financial development is revealed
      in this study.