The Relationship Between Financial Development And Economic Growth

Over last three decades,China's economy has achieved remarkable achievement over the world.Along with this economic achievement is that China had made considerable progress in its financial system.The relationship between financial development and economic growth is one of active fields,which has received considerable attention in academic.Using the provincial data from 1980 to 2013,together with dynamic threshold panel data models with two threshold variables,this doctor dissertation revisit the relationship between financial development and economic growth in China.This dissertation contributes to financial development literature in several dimensions:First,I first use dynamic threshold panel data models with two threshold variables to conduct our investigation.The literature so far mostly uses static threshold panel data models to perform this work.Rare studies consider dynamic threshold panel data models.To my best of knowledge,only Huang and Dong(2013)makes an attempt in this direction,but they confined their analysis with one threshold variable.The existing studies shows that there are two different threshold effects in the relationship between financial development and economic growth,financial development threshold effect and inflation threshold effect.To conform with these studies,this dissertation propose dynamic threshold panel data models with two threshold variables.The proposed model is sufficiently general and flexible,which makes the threshold models appearing in existing studies the special case of mine.Second,I propose a new method to estimate dynamic threshold panel data models and use Monte Carlo simulations to confirm the validity of proposed method.The proposed method allows the threshold effects in intercepts.Third,provided that financial development and economic growth may have two-way causality effects,and the possible endogeneity problem of the control variables,we consider using the lag values as instrument variables to run the regression.My study shows that after controlling the investment rate,government scale,human capital level and growth rate of labor,the relationship between financial development and economic growth depends critically on value of financial development and inflation rate.More specifically,when inflation rate is high and financial development is low,the relationship between financial development and economic growth rate isnegative;when inflation rate high and financial development high,the relationship is more negative than the previous case;when inflation rate is low and financial developent is high,the relationship is positive and when inflation rate is low and financial development is low,the relationship is not significant statistically.In addition,the investment rate,human capital and growth rate of labor contribute positively to the growth rate but the government scale contributes negatively to the growth rate.This dissertation also analyzes the policy implication of the empirical results.