The Study On The Nonlinear Nexus Of Financial Development And Economic Growth

The nexus between financial development and economic growth has been a hottopic in economics. Many scholars have studied this problem from different angles,and many valuable conclusions have been drawn. The early research is generallybelieved that there is a linear nexus between financial development and economicgrowth. On the basis of this assumption, scholars adopt different measurementmethods for the relationship between economic growth and financial development tocarry on the empirical research. Since the21st century, worldwide serious financialcrisis make people have to re-examine the nexus between financial development andeconomic growth. With the constant improvement of financial theory and researchmethods, more and more scholars found that the nexus between financialdevelopment and economic growth is not necessarily linear, the nexus between themis likely nonlinear, even monotonous. So in recent period, a large number of themodels which study on nonlinear nexus between financial development and economicgrowth come out, and among these models markov regime switching model andthreshold models are the most typical.Since the reform and opening, China’s economy has made remarkableachievements. At the same time, China’s financial sector is booming in recent years,providing a steady stream of power for a new round of economic growth. However,the study about China’s nexus between economic growth and financial developmentis few and far between, and most of the studies merely assume that the nexus betweenfinancial development and economic growth is linear. Therefore, this article based onthe foreign research in the field studies nonlinear nexus between financialdevelopment and economic growth in China, using threshold models.First of all, this paper constructs the basic economy model, using the growth rateof real GDP, the growth rate of real investment, the growth rate of real total volume of imports and exports, the growth rate of financial institutions loan and the growth rateof real government spending. This article adopts the sample interval from the firstquarter of1993to the fourth quarter of2013.Then, this article transforms the basic economic model into threshold models.This article selects the the rate of inflation and income growth as the thresholdvariables. The rate of inflation and income growth are the commonly used in theresearch of nonlinear nexus between economic growth and financial development.Therefore, this article selects the inflation and income growth as the thresholdvariable to study the nonlinear nexus between financial development and economicgrowth.Finally, we estimate threshold effect of the inflation and income growth. Theempirical results show that both of them have significant threshold effect on thenexus between financial development and economic growth. We further estimate thethreshold value of inflation rate and income growth rate which splits the sample, andwe did the least squares estimate in each sub-sample. The estimation results aboutinflation rate show that when the inflation rate below the threshold value, financialdevelopment has significant positive effect on economic growth. The estimationresults about income growth show that when the income growth rate above thethreshold method, financial development for economic growth has significant positiveeffect.Combined with empirical results, this article argues that policy makers shouldnot only pay attention to the positive effect of financial development on economicgrowth, but also try to control the inflation rate below the threshold value and theincome growth above the threshold value, so as to ensure the sound and rapideconomic development of China.