It takes the value of 1 for all the subperiods that include the year 2009 and 0 otherwise. The Development Banks and the Merchant banks help in raising capital for these industries. The research project has been financed by the National Science Centre in Poland (decision number DEC-2013/09/B/HS4/03610). The estimated coefficients for the variable Δcred_by_fin are positive and statistically significantly different than zero (assuming a 5 % significance level) in estimated regression equations both for 3- and 5-year data. Rev Financial Econ 11:131–150. The authors used different financial instability indicators that measure the macro and micro dimensions of financial stability: the Composite Indicator of Systemic Stress (CISS, provided by the EBC), aggregate prudential ratios for domestic banks for each country, stock market volatility and own statistical index constructed on the basis of principal component analysis. The mere existence of the financial system influences the decrease of the transaction and the information costs, which are in turn the result of the mismatch between supply and demand structure and the phenomenon of the asymmetry of information. Empirica 44, 295–337 (2017). The results are given in Table 6 and Fig. As regards the other economic growth determinants, denoted as x Scientific publications also indicate that the economic development is one of the most important deep determinants of economic growth (Marcinkowska et al. From one side too much finance can increase the frequency of booms and busts and leave countries ultimately worse off and with lower real GDP growth. Rev Dev Econ 3:310–322. There are available econometric procedures that allow testing causal relationships between variables, like Granger tests. South Econ J 76:224–248, Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. It is worth noting that definitions, which we encounter in different publications, have many common elements, complement each other rather than be mutually exclusive, but also stress different aspects of the financial system. Efficient financial system and sustainable economic growth are corollary. To attain economic development, a country needs more investment and production. Empirically, the services provided by the financial system exert an important impact on long-term economic growth. According to the theory of economics, higher investment leads to higher output both in the short run by stimulating demand and in the long run by adding to the physical capital stock. The findings imply that with increasing depth of financial institutions, buffers tend to decline, other things being equal (Sahay et al. 2001; Abu-Bader and Abu-Qarn 2008; Shan 2005; Blanco 2009; Esso 2010; Hassan et al. It means that a positive impact is seen below a certain stage of capital market development. The authors of the cited report present the new index, the role of which is to evaluate the level of the development of the financial system. Source: Own calculations, The impact of bank capital to assets ratio (%) on economic growth. Table 2 shows basic descriptive statistics for the six financial variables. Econ J 107:783–799. Another conclusion from the IMF report is that financial stability risks increase with financial institution depth. This can happen only when there is a facility for savings. The financial system helps in the promotion of both domestic and foreign trade. The development of the financial system follows then the economic growth (Robinson 1952, on basis of Al-Yousif 2002, p. 132). (2) is the β-convergence coefficient augmented by 1. Although the view may not be universal, it is widely believed that financial system development boosts economic activities in an economy which leads to economic growth. gdp_initial is the initial log GDP per capita level. However, model (2) can be estimated using the instrumental variables method or—more frequently—the generalized method of moments. J Econ Dev 35:57–80, Fase MMG, Abma RCN (2003) Financial environment and economic growth in selected Asian countries. Prochniak, M., Wasiak, K. The impact of the financial system on economic growth in the context of the global crisis: empirical evidence for the EU and OECD countries. As regards the level of market capitalization, it turns out that the relationship is clearly nonlinear as shown in Fig. In accordance to earlier research, the financial sector plays an important part in economic growth as it can reduce the cost of acquiring information, conducting transactions and facilitating savings mobilisation. All the four functions plotted on the graph are concave and have the shape of a downward sloping parabola (ending just before the peak of the parabola). On the contrary, the deepening of finance bears some risks through the negative effects induced by financial instability. The promotion of World Trade Organization (WTO) has further improved international trade and the financial system in all its member countries. 2015). For the model of interest to be valid, there cannot be second-order autocorrelation (while the first order of autocorrelation is not an issue given the fact that the equation is in first differences and the first order autocorrelation of \( \Delta \varepsilon \) stems directly from the non-zero variance of ɛ, while the second order autocorrelation in \( \Delta \varepsilon \) would imply the first order autocorrelation in ɛ and, as a result, inconsistency of the GMM estimator in the used form). East Eur Econ 52:5–27. https://www.sss.ias.edu/files/pdfs/Rodrik/Research/institutions-integration-geography.pdf. Overall, the results indicate that financial system regulation has a statistically significant influence on output and productivity growth, in particular via the impact on industrial sectors relying more heavily on external sources of funding. This is because for many countries the degree of economic openness is rather correlated with the size of a country and not with economic growth. This theme was underlined in the scientific publications at the beginning of the 1990s, although more articles by authors like: Robinson (1952), Schumpeter (1960), Goldsmith (1969), McKinnon (1973), Shaw (1973) or Lucas (1988) do deserve careful attention and constitute the base for thesis being formulated in the span of the following years. Hence, a strong positive impact of market capitalization of listed companies on the growth rate of GDP has been evidenced for those countries and years where the level of capital market development was not excessively high. It is well noted that an efficient and modern payment system is positively correlated with economic development and is a key enabler for economic growth. It is so because the coefficient on initial income is <1 implying that in the standard convergence regression where GDP growth rate is the explained variable the coefficient on initial income would be negative, pointing to a negative impact of initial GDP per capita level on subsequent economic growth. Any business requires two types of capital namely, fixed capital and working capital. 1.4 HYPOTHESIS OF THE STUDY. There is still much room for new empirical and theoretical studies on the relationship between the financial sector and economic growth, especially after the global crisis. To account for heteroskedasticity, the heteroskedasticity-robust errors were computed instead of the non-robust typical standard errors. 2. Econ Model 48:25–40. These results confirm those of Tabi et al. doi:10.1111/1467-9396.00291, Shaw E (1973) Financial deepening in economic development. 305, Instytut Ekonomiczny NBP, Warszawa, Matysek-Jedrych A (2007) System finansowy—definicja i funkcje. In order for the financial system to optimally influence the economic growth, the value of the FD Index should oscillate in the range between 0.4 to almost 0.7 points. Too much of its development can create the risk for its effective functioning. Such a theoretical point of view is confirmed by e.g. Financial systems of different countries are capable of promoting economic integration. The EU28 group includes the following countries: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Rep., Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, UK. Yale University Press, New Haven, Graff M (2002) Causal links between financial activity and economic growth: empirical evidence from a cross-country analysis, 1970–1990. As we can see, the contents of the individual studies are very differentiated. It means that the increase in the volume of credit, or in the other words—credit expansion, is conducive to output growth. The financial system is capable of bringing an uniform interest rate throughout the country by which there will be balanced movement of funds between centres which will ensure availability of capital for all kinds of industries. The aim of the article: to analyze the impact of financial system’s development on economic development. According to this view, the presence of financial middlemen supports the economic growth through the increase of effectiveness of capital accumulation and marginal productivity resulting from it (Goldsmith 1969) and through the increase of the savings rate (McKinnon 1973; Shaw 1973). Macmillan, London, Rodrik D (2002) Institution, integration and geography: in search of deep determinants of economic growth. One of these factors is the financial system. In summation, the relationship between some financial variables and economic growth can be interpreted in terms of the impact of the global crisis. The results for the fifth variable representing the financial system, turnover ratio of stocks traded, are given in Table 7 and Fig. The money market which is a part of financial system, provides working capital to the businessmen and manufacturers due to which production increases, resulting in generating more employment opportunities. For example, Białowolski et al. Initial GDP per capita is the natural logarithm of the GDP per capita level from the last year of the previous subperiod. This suggests that the relationship between financial development and growth may be fundamentally different in resource-dominated economies. It means that banking sector development is significantly influenced by economic growth. Although at the beginning, the prevailing view was that there is an influence of the economic growth on the development of the financial system. 1, pp. 3. it The choice of variables to the analysis should be also placed in a broader area of what aspects of financial sector are included. Thus, the importance of the financial sector of developed countries for their economies is clear as they The industries should be given suitable protection through the financial system so that their credit requirements will be met even during the difficult period. Fifthly, the impact of the government consumption expenditure on economic growth turns out to be rather negative. J Dev Econ 72:321–334. The development of any country depends on the economic growth the country achieves over a period of time. J Polit Econ 98:1076–1107, Greenwood J, Smith BD (1997) Financial markets in development, and the development of financial markets. In the countries with very high capital market development, there is no room for further accelerating economic growth by increasing stock market capitalization. Private sector will find it difficult to raise the huge capital needed for setting up infrastructure industries. The analysis shows that financial intermediation promotes economic growth in about 85 % of the countries and that the influence of the financial sector has the similar strength as that of exports and capital accumulation, but is bigger than the impact of the labor force growth. Following are the other economic growth: the impact of financial system on economic development experience this hypothesis on the basis of the given order imply... Stock of that input, broad money ( % of GDP ), J! Long time, infrastructure industries were started only by the country Greenwood J, Smith BD ( )... 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