Empirical Studies On The Relationships Between The Financial Development, Financial Stability And Economic Growth

After American Subprime crisis, the study about financial development, financial stabilityand economic growth has aroused the attention of governments, monetary authorities and manyscholars. Nowadays, with the development of the globalization of finance, the status of financialsystem in economic development has become more than obvious. Optimizing allocation ofresources, managing systemic financial risk, maintaining balance of international payments are allthe basic functions of financial system. Therefore, exploring the speed of financial developmentand financial system stability during the developing process of financial system have greatimportance on the choice of macro-control policy, the improvement of macro-prudentialregulation, controlling the speed of financial development and forecasting the inflection point ofBusiness cycle.The study about financial development and economic growth has been always a topic inacademic world. Generally, these studies are based on endogenous growth theory, and alwayscome to the following conclusions: the first point of view considers that an acceleration ofrevolving credit (for example: an increase of deposit and loan growth) is benefit for improvingeconomic growth, which is the reason for the significance of financial system. Financial systemcan promote monetary circulation and optimize allocation of resources (King and Levine,1993；Beck et al.,2000). And the other point of view emphasizes that an excessive acceleration on theincrease of credit may cause risk, and may even arouse a monetary crisis which can lead toeconomic recession (Demirgü-Kunt and Detragiache,2000；Schneider and Tornell,2004).Similarly, the studies about financial development and financial stability can not come to aconclusion either. Gai, Jenkinson and Kapadia (2007) as a representative of some scholarsconsiders that with the acceleration of global financial development process, financial systembuilding has become more and more mature. The application of various kinds of financial riskmanagement tools and the financial innovation can diversify systematic financial risk and makecontribution to financial stability. However, there are also some scholars consider that financialdevelopment may not contribute to financial stability, Mishkin (1998) point out that emerging marketing economy is unfit for exchange rate targeting monetary policy, because it may increasefinancial fragility and cause financial instability or even lead to the risk of bank runs and financialcrisis.In addition, there are still many scholars make studies on the relationship between financialfragility and economic growth and come to two points of view. The first one consider that anacceleration of financial development is benefit for economic growth and financial stability; andthe other point of view emphasize that an excessive acceleration of financial development cancase financial fragility and restrain economic growth on some degree.From the conclusions of previous studies we can see that there is no stable linear relationshipbetween financial development, financial stability and economic growth, the interactionmechanism between them varies obvious in the sample period. Therefore, this paper usenon-linear econometric model as the main method to study the non-linear relationship betweenthem in the sample period, and then identify the change of different time points (for example:economic overheating period, financial crisis period and modern recession period). First, thispaper use a TAR model to research the relationship between financial development and economicgrowth, the result shows that there is an obvious non-linear relationship between financialstability and economic growth when using revenue growth rate as a threshold. For specificperformance when the revenue growth rate is over10.31%, financial development will promoteeconomic growth, but when the revenue growth rate is below10.31%, this kind of relationshipwill be no longer in existence which means that in our nation, people may tend to a ventureinvestment during macroeconomic positive and a high income period, however, people willchoose some sound financial management ways such as deposit during a macroeconomic fall.And then, this paper makes a study on the relationship between economic growth andfinancial stability using Markov regime switching model. The results show that there are twokinds of regime between financial stability and economic growth, and financial crisis period isamong the high volatility regime. In different regimes, the relationship between economic growthand financial fragility may converse. Economic growth can improve financial fragility in the lowvolatility regime which means the macro-control will face a trade-off between economic growthand financial fragility in the regime. When in the high volatility regime, economic growth mayweaken the fragility of finance which means the targets of maintaining financial stability andkeeping economic growth are quite consistent with each other in the regime and macro-prudential policies can strength the synergistic effect of them. There is no check and balance relationshipbetween them.In addition, this paper use a smooth transition regression (STR) to measure whether themechanism of how financial development impact on financial stability mechanism changestructurally before and after the financial crisis emphatically. The results shows that when we treatthe year-of-year growth of broad money supply M2as a indicators of financial development, thestructural migration of its impact on financial stability did occur during the sample period. Thestructural migration and the outbreak of the United States subprime mortgage crisis weresimultaneously. Besides, it is more sensitive that the respond of financial vulnerability index tothe financial development speed after the financial crisis.Finally, this paper will put finance development, financial stability and economic growth intoone system, using the VAR model and impulse response function to explore the mechanismamong the three variables. Then we will get the following conclusions: First, the financialdevelopment and financial stability and promote economic growth in the long term for theequilibrium during the whole sample; however, the impacts of economic growth on financialstability and financial development are not significant; finally, when we concern the interactionmechanisms between financial development and financial stability, financial stability hasconducive to long-term financial development, and financial development is not necessarilyreason for financial stability.