Financial development and economic growth: Evidence from Taiwan (China)

This dissertation investigates the linkage between banking development, stock market development, and economic growth using Taiwan's data, 1976Q1–1998Q4. The data covers the period of the late 1980s, when the Taiwanese government switched the financial policy regimes from financial repression to financial liberalization. The overall effect of financial repression is examined along with the effect of policy regime changes on the causality between financial sector development and economic growth.; This dissertation provided evidence that Taiwanese financial repressionist policies have no net impact on economic growth. However, the directed credit program, which allocated funds to preferred industries, is found to have a negative impact on economic growth. Therefore, government intervention is suggested to be a composite of negative and positive effects resulting from efficiency loss and correcting financial market failures.; The financial policy regime change in the late 1980s was found to have impacts on not only the relationship between banks and stock markets but also the causality between financial sector development and economic growth. Banking development and stock market development are complements during financial repression, but become substitutes during financial liberalization. The causality pattern between banking development and economic growth is found to be the same regardless of different policy regimes. However, during financial liberalization, the causality between stock market development and economic growth disappeared.; A small open-economy macroeconomic model was estimated and tested for structural changes that might be caused by the financial policy regime change in the late 1980s. The evidence shows that there is a structural change in the financial market (LM curve) and confirms the change in the behaviors of the Taiwanese economy due to different policy regimes.; The overall conclusion is that banks and stock markets each have different causal relationships with economic growth. Therefore, it is important to separate banks from stock markets when studying the causality pattern with economic growth. In addition, since policy regime changes can cause structural breaks in the macroeconomic relationships and affect the behaviors of the economy, it is important to take structural breaks into consideration when examining the causality between financial development and economic growth for policy inference.