The Relationship Between Financial Development And Economic Growth Based On The Measurable System Of Financial Development Indicators

There is a dispute about the relationship between financial development and economic growth. This article will describe the evolution course of financial development theory, and analyze the differences on logical deduction and empirical approach, and get the reason of current situation and prospect. We realize that the differences on variables, to measure the level of financial development, are the reason of different conclusions. Thus, this article will choose new, objective and overall variables to build an indicator system of financial development. Then, on this basis, we study the relationship between financial development and economic growth.First, we choose 51 countries or districts that full of global influence as the observed object with time span from 2004 to 2014. All of 5 databases are from Word Bank and Word Economic Form. We will apart financial industry into four parts, for Bank Market, Capital Market, Policy and Legal System, and Business Environment. And choose 26 variables to establish a new indicator system of financial development. Second, this article uses principal component analysis (for short PCA) to get the 4 above-mentioned parts’ principal component. Then use the same way to get financial development index. With the method of comparative analysis, we get the differences of level and tendency among China, sample mean, top 10 samples mean. It can be seen that the level standard of China’s financial development is better than average, but there is a structural disequilibrium in financial development. Finally, on the basis of King and Levine’s (1993) model, we choose initial development, endogenous variables, exogenous variables, the degree of opening, and institution factor as control variables, choose financial variables or synthesis score of bank market or synthesis score of non-bank market as explaining variable. We use fixed effect model to analyze the relationship between financial development and economic growth. Then we confirm the conclusion that there is a positive relationship between financial development and economic growth and it is necessity to build the measurable system of financial development indicators. To get rid of endogenous, we choose dynamic panel system GMM to analyze initial model and we confirm the above results.