Financial Development and Economic Growth: Evidence from China
China Economic Review 17 (2006) 395 – 411
Financial development and economic growth: Evidence from China
Qi LIANG a,b,*, Jian-Zhou TENG c,d b Department of Finance, School of Economics, Nankai University, Tianjin, 300071, China Graduate School of Commerce and Management, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan c Graduate School of Economics, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan d School of Mathematics and Statistics, Northeast Normal University, Changchun, 130024, China Received 17 April 2005; accepted 26 September 2005
a
Abstract This paper investigates the relationship between financial development and economic growth for the case of China over the period 1952–2001. After considering the time series characteristics of the dataset, a multivariate vector autoregressive (VAR) framework is used as an appropriate specification and the long-run relationship among financial development, growth and other key growth factors is analyzed in a theoretically based high dimensional system by identification of co-integrating vectors through tests of over-identifying restrictions. The empirical results suggest that there exists a unidirectional causality from economic growth to financial development, conclusions departing distinctively from those in the previous studies. D 2005 Elsevier Inc. All rights reserved.
JEL classification: C32; O11; G28 Keywords: Financial development; Economic growth; Multivariate VAR; Causality; China
1. Introduction The economic growth of China is remarkable since the outset of the reform program in early 1980s. A great number of theoretical and empirical studies have explored the sources of economic growth at both national and provincial levels (e.g., Borensztein & Ostry, 1996; Chen & Feng, 2000; Chow, 1993; Chow & Li, 2002; Wu, 2000; Yu, 1998), and ongoing debate is mainly concerned with which source, factor accumulation or productivity improvement, is the
* Corresponding author. Department
Financial development and economic growth: Evidence from China
Qi LIANG a,b,*, Jian-Zhou TENG c,d b Department of Finance, School of Economics, Nankai University, Tianjin, 300071, China Graduate School of Commerce and Management, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan c Graduate School of Economics, Hitotsubashi University, Kunitachi, 186-8601 Tokyo, Japan d School of Mathematics and Statistics, Northeast Normal University, Changchun, 130024, China Received 17 April 2005; accepted 26 September 2005
a
Abstract This paper investigates the relationship between financial development and economic growth for the case of China over the period 1952–2001. After considering the time series characteristics of the dataset, a multivariate vector autoregressive (VAR) framework is used as an appropriate specification and the long-run relationship among financial development, growth and other key growth factors is analyzed in a theoretically based high dimensional system by identification of co-integrating vectors through tests of over-identifying restrictions. The empirical results suggest that there exists a unidirectional causality from economic growth to financial development, conclusions departing distinctively from those in the previous studies. D 2005 Elsevier Inc. All rights reserved.
JEL classification: C32; O11; G28 Keywords: Financial development; Economic growth; Multivariate VAR; Causality; China
1. Introduction The economic growth of China is remarkable since the outset of the reform program in early 1980s. A great number of theoretical and empirical studies have explored the sources of economic growth at both national and provincial levels (e.g., Borensztein & Ostry, 1996; Chen & Feng, 2000; Chow, 1993; Chow & Li, 2002; Wu, 2000; Yu, 1998), and ongoing debate is mainly concerned with which source, factor accumulation or productivity improvement, is the
* Corresponding author. Department
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