| Having studyied the existing theoretical research and empirical analysis both fromhome country and abroad, using the panel data of Chinese31provinces in1979-2012, thispaper analyzed the correlation between financial development and economic growth. Fromdifferent angles, several empirial methods are used, including the integrated use of a randomcoefficient model combined with T-test and Wald test, panel VAR model andthree-dimensional analysis method. Inflation is implored to interpret the dispute of thecointergration between finance development and economic growth in order to explore theirinteraction rules, paths. The research results are as follows:1. There is a significant relationship between financial development and economicgrowth that financial development is the root cause of economic growth and.First, from the overall situation of Chinese provincial analysis, financial developmenthave a more significant positive impact on economic growth and financial development. Thebetter financial development, the faster economic growth. Scale and efficiency of financialintermediation and financial markets play an important role in promoting economic growthand achieve scale efficiency gains in quality. Accordingly, it is an important prerequisite foreconomic growth to improve financial services, financial services-rich products and toenhance the efficiency of financial operations.The second is from the aspect of a time series analysis of different periods of theprovinces. From the periods comparative analysis in1979-1995and1995-2012, in1995andlater with the change deepening of state-owned assets management system reform of thesocialist market economy, the impact of financial development on economic growth isgradually increased, and the higher the stage of economic development, the stronger of it.Third, the more developed the regional economy, the effect more remarkable offinancial development in promoting the economic growth. Thus, to promote economicgrowth practical significance, different development and financial policies should be takenfor different regions according to local levels of economic development conditions, and theiractual endowment,.Fourth, Chinese economic growth model is that the financial development promotesinvestment in fixed assets, and further fixed assets investment promotes economic growththrough the multiplier effect of circulating growth model. By influencing regulating investment in fixed assets, finance achieves indirect impact on economic growth. Therefore,finance is an important and effective means of macroeconomic control for the government.2. There is a causal relationship between financial development and economic growth.Using a panel VAR model, impulse response function, the prediction error analysisresults and panel Granger causality test, this paper reached several empirical evidence. Thereis a Granger causal relationship between financial development and economic growth. therelationship is bidirectional causality between the yoy growth rate of GDP and the yoygrowth rate of deposit and loan balances of financial institutions. But it is one-way causalitybetween GDP yoy growth and deposits yoy growth of financial institutions. The same it isbetween GDP yoy growth and credit yoy growth and financial institutions.3. The level of inflation affects the level of financial development and the level ofeconomy devepment. There is a negative relationship between inflation and financialdevelopment. Financial development is more sensitive to the changes in inflation.The eastern region is the most developed part in China if it is divided in tree parts, theeast, central and western parts. A high level of financial development of the eastern region isat a higher level of inflation as the cost of financial development plays a vital role. Theeconomic developed level of the central region is in the middle level. Generally low level ofinflation accompany with the lower financial development lead to lower economic growth.Therefore, while controlling inflation, financial development should be to promote in orderto promote economic growth. For the western region, financial development slightly lowersensitivity to inflation; when inflation is low, economic growth can be enhanced throughfinancial development. High inflation can also enhance economic growth to some extent. butthe long term power of economic growth still comes from the financial development.Overall, the high economic growth must be accompanied by a high level of financialdevelopment. It plays different relationships between financial development and economicgrowth in different stages of inflation. Under normal circumstances, inflation and financialdevelopment have a reverse change trend. High inflation will inhibit financial development.Rapid development of finance, not only can promote economic growth, but also translatepart of it into inflation. But ultimately, financial development is the fundamental source ofpower of economic growth. inflation can only bring short-term economic prosperity. Highlevels of financial development will bring economic growth peak.In summary, there is a more significant correlation with Granger causation betweenChinese financial development and economic growth at this stage. Financial development isa necessary condition for economic growth. Financial development is the power and meansto promote economic development. It is of a benign interaction and circulation in them. It isvery important to handle the mutual conversion between them cientificly, making theirrelationships mutual promoting and mutual restraint, improving financial efficiency, smoothing conduction mechanism, increasing the promotion of the role of financialdevelopment on economic growth. It is a fundamental element of seeking a higher level andhigher quality economic growth to deepening financial development, control inflation at areasonable condition. To control inflation in the proper interval is necessary which can beprotection and support for achieving effective finance development and optimizing economicgrowth.
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