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Does financial development ‘lead' economic growth? A vector auto-regression appraisal

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Abstract:

Using a Vector Autoregression (VAR) approach, several hypotheses are re-examined suggested by the literature concerning the relationship between financial development and economic growth, investment and productivity. The models use quarterly time-series data from ten OECD countries and China. Innovation accounting or variance decomposition and impulse response function analysis is applied to examine interrelationships between variables in the VAR system and, therefore, differs from the more usual Granger causality approach. In particular, it examines the relationship between financial development proxied by total credit. At best, weak support is found for the hypothesis that financial development ‘leads' economic growth.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500118762

Affiliations: Guanghua School of Management, Peking University, School of Applied Economics, Victoria University, Melbourne, Victoria 8001, Australia, Email: Jordan.shan@vu.edu.au

Publication date: July 10, 2005

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