Bank Development And Economic Growth, Empirical Research

This dissertation aims at identifying the relationship between financial development and economic growth, especially focusing on the effects of banking development on China's economic growth. To start with, an theoretical framework on the relationship between bank, stock market and economic growth is exerted, and based on the summary and appraisal of existent research findings, a comparative analysis of the influences of banking development and stock market on economic growth is also carried out. While a dynamic effect and bi-directionality between financial development and economic growth are considered, the original Feder model has evolved into a dynamic two-sector model which is composed of financial-supply-leading version and real-demand-following version. This paper attempts to formulate an empirical research on the relationship between banking development and China's economic growth during the periods of 1978-2000, while the results show there remains causality relationship. Banking development can promote economic growth according to the higher marginal factor productivity and the externality, meanwhile the feedback effect of economic growth on banking development is also significant. The external effect of the real sector on the financial sector is higher than the vise verse. This outcome seems to imply that to a larger extent the real-demand-following profile is more prevailing in the studied case. Furthermore, co-integration and error correction model are utilized to explore the mechanism through which banking development may affect economic growth. Our empirical results demonstrates the external effect of banking development mainly refers to promoting capital accumulation, instead of improving the efficiency of resources allocation. What's more, based on Levine & Zervos's econometric model, the synthesized effects of banking development and stock market development are also testified. The results suggest that stock market liquidity and scale of credit to private sector are positively and robustly associated with economic growth, while the impact of the expansion of stock market's size is insignificant. So establishing appropriate financial sector policies are of paramount importance to policy makers.