Two essays in financial markets development & economic growth: An empirical investigation

In these two essays I investigate the short run as well as long run relationship between financial development and economic growth for 12 high-income OECD countries and 16 Asian economies in most efficient manner via system method. ADF, KPSS tests for unit root, Johansen-Juselius cointegration and Park's CCR tests, ECM and SURECM, and Granger causality test in system method are used as empirical evidence. Based on the results of Granger causality test in system method, we found the evidence that there are: 1) strong evidence that direction of causality is bidirectional in most of the cases and its country specific; 2) evidence of positive causality running from finance to growth when DCBY is used as financial proxy and a tendency of reverse causality running from growth to finance when LLY/BM is used as financial proxy, highlighting that direction of causality is sensitive to selection of financial variables; 3) an evidence that one-way causality such as positive and reverse causalities are more prominent for middle to low income countries; 4) an evidence that China has a huge impact on Asian economy, more precisely it has a significant impact on developing economies; 5) selection of control variables does not affect the model specification and the direction of causality for Asian economies, however it affects the direction of causality for European sub-group when LLY is used as financial proxy; and 6) system method is superior to traditional regression methods.