Financial development and economic growth: Panel evidence from BRICS

Gu u, Biplab Kuma ; Yada , Inde Sekha
A icle
Financial de elopmen and economic g ow h: Panel
e idence om BRICS
Jou nal o Economics, Finance and Adminis a i e Science
P o ided in Coope a ion wi h:
Uni e sidad ESAN, Lima
Sugges ed Ci a ion: Gu u, Biplab Kuma ; Yada , Inde Sekha (2019) : Financial de elopmen and
economic g ow h: Panel e idence om BRICS, Jou nal o Economics, Finance and Adminis a i e
Science, ISSN 2218-0648, Eme ald Publishing Limi ed, Bingley, Vol. 24, Iss. 47, pp. 113-126,
h ps://doi.o g/10.1108/JEFAS-12-2017-0125
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Financial de elopmen and
economic g ow h: panel e idence
om BRICS
Biplab Kuma Gu u and Inde Sekha Yada
Humani ies and Social Sciences, Indian Ins i u e o Technology Kha agpu ,
Kha agpu , India
Abs ac
Pu pose –The pu pose o his pape is o examine he ela ionship be ween financial de elopmen and
economic g ow h o fi e majo eme ging economies: B azil, Russia, India, China and Sou h (BRICS) du ing
1993 o 2014 using banking sec o and s ock ma ke de elopmen indica o s.
Design/me hodology/app oach –To begin wi h, he s udy fi s examined some o he p incipal
indica o s o financial de elopmen and mac oeconomic a iables o he selec ed economies. Nex , using
gene alized me hod o momen sys em es ima ion (SYS-GMM), he ela ionship be ween financial
de elopmen and g ow h is in es iga ed. The banking sec o de elopmen indica o s used in he s udy
include size o he financial in e media ies, c edi o deposi a io (CDR) and domes ic c edi o p i a e sec o
(CPS), whe eas he s ock ma ke de elopmen indica o s a e alue o sha es aded and u no e a io. Also,
some mac oeconomic con ol a iables such as infla ion, expo s and he en olmen in seconda y educa ion
we e used.
Findings –The examina ion o he p incipal indica o s o financial de elopmen and mac oeconomic
a iables ha e shown conside able di e ences be ween he selec ed economies. Resul s om he dynamic
one-s ep SYS-GMM es ima es confi m ha in p esence o u no e a io, all he selec ed banking de elopmen
indica o s such as size o financial in e media ies, CDR and CPS a e posi i ely significan ly de e mining
economic g ow h. Simila ly, in p esence o all he selec ed banking sec o de elopmen indica o s, alue o
sha es aded is ound o be posi i ely significan ly associa ed wi h economic g ow h. Howe e , he same is
no ue when u no e a io is eg essed in p esence o banking sec o a iables. O e all, he e idence
sugges s ha banking sec o de elopmen and s ock ma ke de elopmen indica o s a e complemen a y o
each o he in s imula ing economic g ow h.
P ac ical implica ions –A posi i e associa ion be ween financial de elopmen and g ow h indica es
ha he policymake s should ake necessa y measu es owa d simul aneous de elopmen o bo h banking
sec o as well as s ock ma ke o inducing g ow h.
O iginali y/ alue –The p esen pape a emp s o examine he ela ionship be ween financial
de elopmen and g ow h using bo h banking sec o and s ock ma ke de elopmen indica o s which has no
been a emp ed be o e o BRICS. Also, mos o he exis ing s udies a e ound in case o de eloped economies.
This pape ies o fill his oid by s udying fi e majo eme ging economies.
Keywo d G ow h
Pape ype Resea ch pape
© Biplab Kuma Gu u and Inde Sekha Yada . Published in Jou nal o Economics, Finance and
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Financial
de elopmen
and economic
g ow h
113
Recei ed 30 Decembe 2017
Re ised 12 June 2018
Accep ed 13 No embe 2018
Jou nal o Economics, Finance and
Adminis a i e Science
Vol. 24 No. 47, 2019
pp. 113-126
Eme ald Publishing Limi ed
2077-1886
DOI 10.1108/JEFAS-12-2017-0125
The cu en issue and ull ex a chi e o his jou nal is a ailable on Eme ald Insigh a :
www.eme aldinsigh .com/2077-1886.h m
1. Backg ound
De elopmen o an economy equi es i s financial sec o o be de eloped. And he
de elopmen o financial sec o happens in he p ocess o ounding and g ow h o
ins i u ions, ins umen s and ma ke s ha sus ain he huge in es men s and g ow h which
help in educing po e y. Acco dingly, financial de elopmen gi es be e in o ma ion abou
possible p ofi able in es men s and p omo es op imum alloca ion o capi al. In o he wo ds,
he eme gence o financial ins i u ions helps in cu ailing cos o acqui ing in o ma ion and
e ec i ely implemen s con ac s and execu es ansac ions. Also, he expanding financial
access inculca es dynamic e ficiency in he sys em by b inging abou a s uc u al change
h ough inno a ion and wel a e gain o he en i e economy.
De elopmen o financial sys em may be defined as he de elopmen o he size,
e ficiency and s abili y o financial ma ke s along wi h inc eased access o he financial
ma ke s ha can ha e mul iple ad an ages o he economy. Fo ins ance, a well-de eloped
financial ma ke channelizes he sa ings o an economy o p ofi able in es men s (S igli z
and Weiss, 1983;Diamond, 1984), educe in o ma ion cos he eby leading o be e capi al
alloca ion (G eenwood and Jo ano ic, 1990) and also educe he cos o co po a e
go e nance (Benci enga and Smi h, 1993). Also, de eloped financial in e media ies boos
he echnological inno a ion h ough ewa ds o he en ep eneu s (King and Le ine, 1993b).
Fu he , acco ding o Le ine (1997),financial sys ems assis in ading, di e sifica ion,
hedging and isk amelio a ion, apa om acili a ing ansac ions o goods and se ices.
Also, acco ding o Le ine (1997), capi al accumula ion and echnological inno a ion a e he
pa aphe nalia be ween financial de elopmen and g ow h. The alloca ion o c edi h ough
financial sys em wo ks as a channel be ween financial and eal sec o s, which can be used o
finance wo king capi al equi emen s and in es men in fixed capi al; he o me is used o
aise p oduc ion whe eas he la e enhances p oduc i i y in he eal sec o (Das and Guha-
Khasnobis, 2008).
Howe e , con a y o abo e, some economis s also ha e a di e en pe cep ion owa d he
associa ion be ween financial de elopmen and economic g ow h. Leading his school o
hough , Robinson (1952) opined, “finance plays a mino ole in economic g ow h; a he i is
d i en by g ow h.”Acco ding o Wijnbe g (1983) and Bu fie(1984), because o financial
de elopmen , bo owe s om in o mal sec o shi o o mal sec o which in u n educes
he o al supply o c edi , he eby s ifling economic g ow h o he conce ned economy.
Fu he , Lucas (1988) insis ed ha financial ma ke s play a lesse ole in an economy’s
de elopmen .
Also, ecen ly Shan (2005) opined ha Asian economic c isis o 1997 u he cas s’doub
on financial de elopmen as a d i e o economic g ow h, as he e he financial ma ke s
ailed o alloca e he la ge inflow o unds in o p ofi able en u es. Fu he , he global
financial c isis o 2008 indica es he ailu e o financial ma ke s which was mainly d i en by
subp ime mo gage lending. Thus, he ailu e o he economies in moni o ing and egula ing
he e ol ing financial ma ke s and inabili y o keep pace wi h he financial inno a ion
wa an s he p uden and sound de elopmen o financial ma ke s which may ha e se ious
implica ion o an economy as a whole. In his con ex , i is wo h no ing ha e y ew
s udies ha ha e examined he finance and g ow h ela ionship in BRICS (B azil, Russia,
India, China and Sou h A ica) ha e ba ely s udied he impac o banking sec o and s ock
ma ke de elopmen on economic g ow h sepa a ely.
Agains his backd op, he p esen pape endea o s o in es iga e he ela ionship
be ween financial de elopmen and g ow h o a panel o fi e majo eme ging economies
(BRICS) du ing 1993 o 2014. The es o he pape is o ganized as ollows: Sec ion II
p esen s some p incipal indica o s o financial de elopmen and mac oeconomic a iables
JEFAS
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114
o BRICS. Sec ion III discusses some p ominen li e a u e pe aining o financial
de elopmen and g ow h. Sec ion IV ou lines econome ic me hodology. Sec ion V discusses
empi ical findings, and finally summa y and conclusion a e d awn in Sec ion VI.
2. P incipal indica o s o financial de elopmen and mac oeconomic a iables:
B azil, Russia, India, China and Sou h A ica
Figu e 1 depic s some p incipal indica o s o financial de elopmen and mac oeconomic
a iables o he selec ed economies du ing 1993 o 2014. The p incipal indica o s o financial
de elopmen used in he s udy include a iables ep esen ing bo h he de elopmen o
banking sec o as well as s ock ma ke o an economy. Banking sec o de elopmen
indica o s include:
financial dep h (FDP), a measu e o he size o he financial in e media ies o an
economy is measu ed as he pe cen age o bank’s liquid liabili ies o g oss domes ic
p oduc (GDP) (Le ine, 1997;Adusei, 2013);
bank size (BS), a measu e o he dep h o a bank is measu ed as a a io o
comme cial bank asse s o deposi money bank asse s plus cen al bank asse s
(Le ine, 1997);
c edi o deposi a io (CDR), a measu e o financial s abili y wi hin he coun y and
he ex en o banking pene a ion is measu ed as pe cen age o bank c edi o bank
deposi s; and
domes ic CPS, is measu ed as domes ic CPS as pe cen age o GDP (Le ine, 1997;
Le ine and Ze os, 1998;Saci e al., 2009;Adusei, 2013).
The s ock ma ke indica o s include:
s ock ma ke size (SS), a measu e o s ock ma ke size is measu ed as o al alue o
all lis ed sha es o s ock ma ke as a pe cen age o GDP;
 alue o sha es aded (VT), a measu e o liquidi y on an economy wide basis is
measu ed as o al alue o sha es aded in a s ock ma ke exchange as a pe cen age
o GDP (Le ine and Ze os, 1998;Saci e al., 2009); and
 u no e a io (TOR), ano he measu e o liquidi y measu ed as he a io o alue o
o al sha es aded o a e age eal ma ke capi aliza ion (Le ine and Ze os, 1998;
Beck e al., 2000;Saci e al., 2009).
Economic g ow h, a mac oeconomic a iable is measu ed as pe capi a income (PCI)
g ow h (Le ine, 1997). Also, ollowing he exis ing li e a u e, some mac oeconomic
con ol a iables used in he s udy a e infla ion (INF), expo s as pe cen age o GDP
and he log o numbe o en olmen in seconda y educa ion o he selec ed economies.
All he necessa y a iables we e culled om Wo ld De elopmen Indica o s (WDI)
published by Wo ld Bank.
F om Figu e 1, i is obse ed ha he a e age g ow h a e o PCI o he selec ed
economies anged be ween 1.18 pe cen (Sou h A ica) and 9.14 pe cen (China) du ing he
pe iod o analysis (1993-2014). In case o B azil, Russia and India, he a e age g ow h a e o
PCI is abou 1.92, 2.02 and 5.20 pe cen , espec i ely, du ing he s udy pe iod. F om
Figu e 1, i is obse ed ha he FDP has been inc easing since 1993 o he selec ed
economies. The a e age pe cen age o bank’s liquid liabili ies o GDP o China is abou
134.79 pe cen ollowed by India (58.91 pe cen ), B azil (49.70 pe cen ), Sou h A ica (45.14
pe cen ) and Russia wi h a low o 29.94 pe cen . Simila ly, he a io o comme cial bank
Financial
de elopmen
and economic
g ow h
115
asse s o deposi money bank asse s plus cen al bank asse s has inc eased o e he s udy
pe iod. The a e age size o he banking sec o o Sou h A ica is abou 97.77 pe cen
ma ginally highe han China (97.23 pe cen ) ollowed by India (89.16 pe cen ), Russia
(84.51 pe cen ) and B azil (83.56 pe cen ).
Figu e 1.
P incipal indica o s
o financial
de elopmen and
mac oeconomic
a iables: BRICS
–10 010 20
PCI G ow h Ra e
1993 1997 2001 2005 2009 2013
Yea
Pe Capi a Income (%)
050 100 150 200
Financial Dep h
1993 1997 2001 2005 2009 2013
Yea
Financial Dep h (%)
60 70 80 90 100
Bank Size
1993 1997 2001 2005 2009 2013
Yea
Bank Size (%)
0100 200 300 400
CDR
1993 1997 2001 2005 2009 2013
Yea
C edi o Deposi Ra io (%)
050 100 150
CPS
1993 1997 2001 2005 2009 2013
Yea
C edi o P i a eSec o (%)
050 100 150 200 250
S ock Ma ke Size
1993 1997 2001 2005 2009 2013
Yea
S ock Ma ke Size (%)
050 100 150
Value T aded
1993 1997 2001 2005 2009 2013
Yea
Value T aded (%)
0200 400 600
TOR
1993 1997 2001 2005 2009 2013
Yea
Tu no e Ra io (%)
10 20 30 40 50
EXPORTS
1993 1997 2001 2005 2009 2013
Yea
Expo s (%)
0500 1,000 1,500 2,000
In la ion Ra e
1993 1997 2001 2005 2009 2013
Yea
In la ion Ra e (%)
15 16 17 18 19
Log o En olmen
1993 1997 2001 2005 2009 2013
Yea
En olmen in Educa ion
B azil China
India Russia
Sou h A ica
Sou ce: Compiled by au ho s based on he da a collec ed om Wo ld De elopmen Indica o s
o Wo ld Bank
JEFAS
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116

The mean CDR o China (281.67 pe cen ) which measu es he financial s abili y and
banking pene a ion is ound o be he highes among he selec ed economies which is also
abou wice ha o Sou h A ica (122.61 pe cen ) du ing he s udy pe iod ollowed by B azil
(98.33 pe cen ), Russia (98.26 pe cen ) and India (68.91 pe cen ). CPS, ano he measu e o
banking sec o de elopmen , shows ha he mean alue o he a iable o Sou h A ica
(132.18 pe cen ) is highes ollowed by China (112.46 pe cen ), B azil (47.22 pe cen ), India
(36.80 pe cen ) and Russia (27.47 pe cen ).
Nex , he examina ion o he s ock ma ke de elopmen indica o s o he selec ed
economies shows ha he mean SS o Sou h A ica is abou 184.53 pe cen ollowed by
India (52.47 pe cen ), B azil (38.97 pe cen ), Russia (35.88 pe cen ) and China (34.94 pe
cen ). Fu he , alue o sha es aded, a p oxy o he s ock ma ke liquidi y indica es ha
he mean alue o he a iable du ing he s udy pe iod is abou 52.92 pe cen o China
ollowed by Sou h A ica (42.56 pe cen ), India (33.26 pe cen ), Russia (21.74 pe cen ) and
B azil (21.11 pe cen ). Finally, he mean u no e a io is ound o be highes in China
(163.82 pe cen ) ollowed by India (106.03 pe cen ), B azil (67.63 pe cen ), Russia (62.97 pe
cen ) and Sou h A ica (23.99 pe cen ).
Among he selec ed con ol a iables, infla ion was unexpec edly high o B azil and
Russia in ea ly 1990s which smoo hed in subsequen yea s. The mean infla ion o China is
abou 4.50 pe cen ollowed by 6.51 pe cen o Sou h A ica and 7.45 pe cen o India o e
he s udy pe iod 1993-2014.
Nex , expo s exp essed as a a io o GDP, an indica o o he ela i e impo ance
o in e na ional ade in he economy indica es ha he mean alue o he a iable
du ing he s udy pe iod is highes in case o Russia (31.97 pe cen ) ollowed by Sou h
A ica (27.51 pe cen ), China (24.81 pe cen ), India (17.08 pe cen ) and B azil (11.38
pe cen ). Finally, he mean g ow h o numbe o en olmen s in seconda y educa ion is
ound o be p omising in case o India, B azil and Sou h A ica compa ed o Russia
and China.
3. Theo e ical and analy ical amewo k
The seminal exe ion by Schumpe e (1934),Goldsmi h (1969),McKinnon (1973) and Shaw
(1973) unde sco es he ele ance o financial de elopmen o economic g ow h o some
conside able ime. To begin wi h, Goldsmi h (1969) sough o in es iga e fi s how economic
g ow h leads o changes in financial s uc u e, which is he asso men o financial
ins umen s, in e media ies and ma ke s. Second, Goldsmi h ied o examine he impac o
financial de elopmen on economic g ow h. Thi d, Goldsmi h sough o assess whe he he
s uc u e o a coun y’sfinancial sys em influences he a e o economic g ow h. In o he
wo ds, does he mix u e o financial in e media ies and ma ke s unc ioning in an economy
influence economic de elopmen .
Fo he fi s issue, Goldsmi h ound ha de elopmen o economies leads o he e olu ion
o and imp o emen s in he financial sys em. Pa icula ly, he s a ed ha banks end o g ow
bigge ela i e o na ional ou pu along wi h economic de elopmen . Fo he second issue,
Goldsmi h was no ully success ul in e alua ing he nexus be ween he le el o financial
de elopmen and economic g ow h. In his wo k, he ook a panel o 35 coun ies using da a
p io o 1964 and documen ed a posi i e co ela ion be ween financial de elopmen and he
le el o economic ac i i y, bu he e ained clea ly om d awing causal in e p e a ions om
his g aphical analysis. Thus, Goldsmi h always e ained om asse ing any causal
in e ence ha uns om financial de elopmen o economic g ow h. Finally, o he hi d
issue, because o c oss-coun y da a limi a ions, Goldsmi h ailed o subs an ia e much on
Financial
de elopmen
and economic
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117
he associa ion be ween economic de elopmen and he combina ion o financial
in e media ies and ma ke s ope a ing in an economy.
To Goldsmi h’s (1969) second objec i e which was o es ablish he nexus be ween
financial de elopmen and economic g ow h, conside able p og ess has been made o
expand he analysis in subsequen esea ch. Fo example, o begin wi h, la e 1960s and ea ly
1970s, mos o he s udies a emp ed o in es iga e he associa ion be ween financial
de elopmen , economic g ow h and educ ion o po e y. Specifically, subsequen li e a u e
has embodied addi ional findings on he finance–g ow h ela ionship and engul s he wide
app oach on causal associa ion whe e c oss-coun y, fi m-le el and indus y-le el s udies
sugges ha economic g ow h is posi i ely d i en by a de eloped financial sys em.
A e Goldsmi h’s (1969) wo k, he subsequen s udies can be di ided mainly in o wo
ca ego ies iz., s uc u alis s and ep essionis s. The main con en ion o s uc u alis s is he
quan i y, composi ion and s uc u e o financial a iables ha p omp economic g ow h by
mobiliza ion o sa ings, which in u n inc eases capi al o ma ion leading o economic
g ow h he eby educing po e y (Guha-Khasnobis and Ma o as, 2008).
On he o he hand, McKinnon (1973), and Shaw (1973) lead he financial ep essionis s,
and hei hypo hesis is popula ly e e ed o as he “McKinnon-Shaw”hypo hesis. They
con ended ha an app op ia e a e o e u n on accoun o financial libe aliza ion on he eal
cash balances is a d i e o economic g ow h. The undamen al p inciple o hei hypo hesis
is ha a low o nega i e eal in e es a e will dampen sa ings which will sh ink he supply
o loanable unds o in es men , which will in u n pull back he g ow h a e. The e o e, he
McKinnon–Shaw model s a es ha financial libe aliza ion will ampli y compe i ion, induce
an inc ease in sa ings by aising in e es a es and he eby p omo e in es men and
consequen ly p omo e economic g ow h.
A e he ea ly deba e on he ela ionship be ween financial de elopmen and
economic g ow h, many subsequen empi ical s udies (using ecen da a) ha e ound
mixed esul s wi h espec o he associa ion o financial de elopmen and g ow h.
Also, la e some empi ical s udies a emp ed o es ablish a cause and e ec ela ionship
be ween he wo and made an a emp o make ce ain p edic ions on he basis o he
na u e o associa ion.
Fo ins ance, King and Le ine (1993a), using he da a o 77 coun ies o e he 30-yea
pe iod om 1960 o 1989, es ablished he p esence o s a is ically significan posi i e
ela ionship be ween FDP wi h g ow h in eal pe capi a GDP, eal pe capi a capi al s ock
and o al p oduc i i y, espec i ely. Also, Beck and Le ine (2004) u he using he
gene alized me hod o momen s (GMM) and a e aged non-o e lapping fi e yea ’s da a om
1976 o 1998, o 40 coun ies es ablish ha he de elopmen o bank and s ock ma ke
sec o posi i ely influenced economic g ow h.
Howe e , e y ecen ly, Saci e al. (2009) using indica o s o de elopmen in banking
sec o and s ock ma ke ound ha s ock ma ke de elopmen indica o s ha e posi i e
significan e ec on g ow h. Howe e , i was ound ha in he p esence o s ock ma ke
de elopmen indica o s, banking sec o de elopmen nega i ely influenced economic
g ow h. Recen ly, Lei ao (2010) ound a posi i e co ela ion o financial de elopmen wi h
economic g ow h o 27 Eu opean Union Coun ies and fi e BRICS coun ies be ween 1980
and 2006. Again, Adusei (2013) using dynamic GMM model o 24 selec ed A ican coun ies
o e he pe iod 1981-2010 ound a posi i e ela ionship be ween financial de elopmen and
economic g ow h. Fu he , using pai wise g ange causali y es ing, hey suppo ed he
e idence o bidi ec ional causali y be ween financial de elopmen and economic g ow h.
Wi h espec o causali y be ween financial de elopmen and g ow h s udies like Jung
(1986) ound a bidi ec ional causali y be ween eal and financial a iables on he basis o
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da a collec ed o 56 coun ies in he pos wa pe iod, including 19 de eloped indus ial
economies. Also, King and Le ine (1993a)find ha financial de elopmen is no he ou come
o economic g ow h, a he finance leads o g ow h. Fu he , Wach el and Rousseau (1995)
s a ed ha financial de elopmen does G ange -causes g ow h. Also, Luin el and Khan
(1999) ound bidi ec ional causali y be ween financial de elopmen and economic g ow h
o a sample o en economies. Simila ly, Wolde-Ru ael (2009) ound bidi ec ional causali y
be ween economic g ow h and each o he financial de elopmen a iables.
Howe e , con e sely, Deme iades and Hussein (1996) conduc ing causali y analysis
ound li le e idence on he causali y flowing om financial de elopmen o economic
g ow h. They no e ha causali y pa e ns a y ac oss coun ies. Fu he , s udies like Le ine
and Ze os (1998) ha e shown ha bank loans o p i a e en e p ises as a p opo ion o GDP,
s ock ma ke u no e a io and alue o sha es aded a e obus p edic o s o economic
g ow h, p oduc i i y g ow h and capi al accumula ion. Also, Bhanumu hy and Singh
(2013) did no find a long- un equilib ium ela ionship be ween bank b anches and s a e
domes ic p oduc o India. Finally, Menyah e al. (2014) ound financial de elopmen o
ade o ha e no causal associa ion wi h economic g ow h.
4. Me hodology
As men ioned be o e, he nexus be ween financial de elopmen and g ow h is in es iga ed
o a panel o fi e coun ies, iz., BRICS. The economies selec ed in he panel a e la gely
he e ogeneous wi h espec o hei geog aphical egion, cul u e, poli ical and financial
s uc u es leading o high a ia ion in explana o y a iables o pe o m he panel
eg essions. The pe iod o analysis is om 1993 o 2014 which co e s mainly an e a o
libe aliza ion, apid economic g ow h and ola ile wo ld ma ke s. As no ed be o e, all he
necessa y a iables we e collec ed om WDI published by Wo ld Bank.
In he p esen s udy, eal GDP pe capi a g ow h (PCI) is he dependen a iable, a p oxy
which measu es he g ow h o he selec ed economies. Banking sec o indica o s such as
FDP, CPS, CDR and BS a e he selec ed explana o y a iables which measu e he banking
sec o de elopmen . Also, he s ock ma ke indica o s such as SS, u no e a io (TOR) and
alue o sha es aded (VT) a e he selec ed explana o y a iables which measu e he s ock
ma ke de elopmen . Fu he , infla ion (INF), expo s as pe cen age o GDP (EXP) and
en olmen in seconda y educa ion (LNESE) a e used as con ol a iables in he model. All
he independen a iables ba ing infla ion a e expec ed o ha e a posi i e impac on he
g ow h a e.
The ollowing is he specified eg ession model used in he s udy:
Yi; ¼
a
þ
b
Yi; 1þ
g
Xi; 1þ
h
iþ
e
i; (1)
whe e, Yis dependen a iable, Xs ands o a ec o o explana o y a iables,
h
is he ime
in a ian coun y-specificfixed e ec ,
«
is he dis u bance e m which ollows N(0,
s
2
) and
he subsc ip s “I”and “ ” ep esen coun y and ime, espec i ely.
In equa ion (1), he dependen a iable is lagged, and we ha e ime in a ian coun y-
specificfixed e ec s. I he coun y fixed e ec s in he panel da a es ima ion a e omi ed, i
will lead o biased and inconsis en o dina y leas squa es (OLS) es ima o s in le els (Hsiao,
1986). Fu he , se e al igh -hand side explana o y a iables can be endogenous. The e o e,
o a oid he simul anei y p oblem, one mus con ol o endogenei y o he explana o y
a iables in he eg ession model (Hao, 2006). Le ine and Ze os (1998) used ini ial alues o
explana o y a iables as ins umen s o ge id o simul anei y p oblem. Howe e , his
esul s in in o ma ion loss as well as po en ial consis ency loss ende ing he es ima ion
Financial
de elopmen
and economic
g ow h
119
ine ficien (Beck and Le ine, 2004). Thus, o he model o be e ficien and consis en , p ope
ins umen s should be used in place o he ini ial alues o he explana o y a iables.
The e o e, o his, A ellano and Bond (1991) p opose he fi s -di e enced GMM
es ima o . Thus, ollowing he me hodology o A ellano and Bond (1991), he ollowing
model has been specified in he p esen s udy:
Yi; Yi; 1¼
b
Yi; 1Yi; 2

þ
g
Xi; Xi; 1

þ
«
i; 
«
i; 1
ðÞ (2)
In equa ion (2),fi s -di e encing elimina es he in e cep as well as he coun y-specific
e ec s (
h
i
). Howe e , es ima ion o equa ion (2) will be biased and inconsis en , as he
lagged dependen a iable Yi; 1Yi; 2

and he e o e m
«
i; 
«
i; 1
ðÞ
will be
co ela ed (Hao, 2006). Fu he , o agg a a e he p oblem, he selec ed explana o y a iables
may be endogenous as no ed be o e. Thus, A ellano and Bond (1991) impose he ollowing
momen es ic ions which ules ou he possibili y o endogenei y wi hin he model.
EYi; n
«
i; 
«
i; 1
ðÞ

¼0 o n 2; ¼3;...:; T(3)
EXi; n
«
i; 
«
i; 1
ðÞ

¼0 o n 2; ¼3;...:; T(4)
Howe e , he abo e momen es ic ions a e applied unde he assump ions ha :
 he dis u bance e m is se ially unco ela ed; and
 he eg esso s a e weakly exogenous which means ha he eg esso s a e
unco ela ed wi h he p esen and u u e alues o he dis u bance e m bu may be
co ela ed wi h he pas ealiza ions o he dis u bance e m (Hao, 2006).
The e o e, he alid ins umen s would be lagged alues o explana o y a iables.
Also, as no ed be o e, OLS es ima ion o equa ion (2) will be biased and inconsis en ,
because he dependen a iable in he equa ion can be co ela ed wi h he dis u bance
e m.
5. Empi ical findings and discussion
Table I epo s he co ela ion ma ix o he selec ed a iables used in he s udy. The
selec ed explana o y a iables, iz., FDP, BS, CDR, VT, TOR and LNESE a e posi i ely and
significan ly co ela ed wi h he g ow h a e o PCI excep expo s which is posi i e bu
insignifican , whe eas he co ela ion be ween infla ion and he g ow h a e is nega i e bu
insignifican . FDP is posi i ely and significan ly co ela ed wi h bank size, CDR, p i a e
c edi , alue o sha es aded and u no e a io, whe eas nega i ely and significan ly
co ela ed wi h infla ion bu unco ela ed wi h o he wo con ol a iables, namely, expo s
and educa ional en olmen . Simila ly, BS is posi i ely and significan ly co ela ed wi h
CDR, p i a e c edi , alue o sha es aded and expo s. Howe e , BS mo es in he opposi e
di ec ion o u no e a io, infla ion and educa ional en olmen . Again, CDR has significan
and posi i e co ela ion wi h p i a e c edi , alue o sha es aded and u no e a io,
whe eas he o me does no mo e in he same di ec ion o infla ion and educa ional
en olmen . Though CDR has posi i e co ela ion wi h expo s bu is ound o be
insignifican . P i a e c edi and alue o sha es aded a e posi i ely and significan ly
co ela ed, and hei di ec ion o co-linea i y is posi i e and significan wi h u no e a io
and expo s. Fu he , p i a e c edi and alue o sha es aded a e nega i ely and
significan ly co ela ed wi h infla ion, whe eas hey mo e in he opposi e di ec ion o
JEFAS
24,47
120