Does Financial Development Cause Economic Growth? A Panel Data Dynamic Analysis for the Asian Developing Countries

Abstract This paper examines the causal relationship between financial development and economic growth of the Asian developing countries from a panel data perspective and uses the system GMM technique developed by Arellano & Bover (1995) Arellano, M. and Bover, O. 1995. Another look at the instrumental variable estimation of error-component models. Journal of Econometrics, 68: 5–27. CROSSREFCSA Google Scholar and Blundell & Bond (1998) Blundell, R. W. and Bond, S. R. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87: 29–52. CROSSREFCSA Google Scholar and conducts causality testing analysis. The panel data sets involve 13 Asian developing countries: Bangladesh, India, Indonesia, South Korea, Lao PDR, Malaysia, Myanmar, Nepal, Pakistan, Philippine, Singapore, Sri Lanka and Thailand for the period 1990–1998. The result of our study is in agreement with other causality studies by Calderon & Liu (2003) Calderon, C. and Liu, L. 2003. The direction of causality between financial development and economic growth. Journal of Development Economics, 72: 321–334. CROSSREFCSACrossref, Web of Science ® , Google Scholar, Fase & Abma (2003) Fase, M. M. G. and Abma, R. C. N. 2003. Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14: 11–21. CROSSREFCSACrossref , Google Scholar, and Christopoulos & Tsionas (2004) Christopoulos, D. K. and Tsionas, E. G. 2004. Financial development and economic growth: evidence from panel unit root and cointegration tests. Journal of Development Economics, 73: 55–74. CROSSREFCSACrossref, Web of Science ® , Google Scholar that financial development promotes growth, thus supporting the old Schumpeterian hypothesis and Patrick's ‘supply-leading’ hypothesis.