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Financial development and economic growth: the case of Taiwan

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This paper examines the relationship between financial development and economic growth in Taiwan from 1962 to 1998. Using a four-variable VAR model, the competing hypotheses of demand-following versus supply-leading are empirically tested. The results from Granger causality tests based on vector error-correction models (VECM) suggest unidirectional causality running from financial development (measured as the ratio of M2 to GDP) to economic growth. This result supports the supply-leading hypothesis for Taiwan. This finding highlights the importance of financial development in Taiwan's recent growth.

Document Type: Research Article


Affiliations: 1: Department and Graduate Institute of Economics, Feng Chia University, Taichung, Taiwan 2: Department of Economics, Auburn University, AL 36849, USA

Publication date: July 10, 2005

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