Conclusion and Recommendations

This book started with a brief review of different outlooks on the role of financial sector development in the process of economic growth. Then it highlighted the fact that recent studies, particularly those originating from modern growth theory, suggest that financial intermediation affects growth through various channels. To test this proposition, an empirical model was built, data were obtained, empirical tests were carried out, and results were discussed. The final chapter in this book, therefore, summarises key research findings and discusses the potential channels through which financial sector development affects the economic growth process. The chapter further highlights contributions of this research to growth studies, discusses policy implications arising from the findings of this research, and provides directions for future research and analysis.

Results and Discussion 2

The empirical analysis of this chapter provides insights into the functioning of the economies of three selected countries. Later in the chapter, the dynamic responses of the model to shocks in indicators of financial development are investigated. To obtain credible impulse response analysis, economic theory is used to set the required identifying restrictions instead of using an “unrestricted” vector autoregressive model. The structural form of the model then is summarised in the chapter by the variance decomposition and impulse response functions. The general results from impulse response functions advocate the theory of financial intermediation arguing that the development of the financial market helps to promote economic growth. Furthermore, the results of variance decomposition shows that different measures of financial development influence the variation of growth variables, particularly investment, savings, and productivity growth.

Endogenous Growth Theory and Financial Sector

This chapter provides an outline of the endogenous growth theory. Endogenous or modern growth theory argues that financial intermediaries and securities markets allow business owners and investors to undertake innovative activities, which affects economic growth. Furthermore, other groups of studies that are concerned with issues like money creation, credit constraints, government interventions, and market failure are discussed in this chapter in parallel with endogenous growth theory. Later in the chapter, releasing the process of finance in different schools of thought including neo-classical, monetarist, Keynesians, and post-Keynesians is addressed. The discussion in the chapter ends with a review of the most commonly used indicators of financial market development, including but not limited to monetisation ratio, domestic credit availability, and stock market capitalisation.

Post-Keynesian Empirical Research and the Debate on Financial Market Development

Literature suggests that financial intermediation affects growth through various channels. The questions, however, are “Whether financial development affects real economic activities?” and “Does the structure of the financial system matter for the economic growth outcome?” The aim of this chapter is, therefore, to briefly describe the concept of financial market development by highlighting the important role of the financial sector in the development of the real sector. Later in the chapter, the scope of the book is discussed, and research objectives are identified.

Post-Keynesian Macroeconomic Models

The idea that the financial sector can amplify the business cycle dates back to the early 1900s. The main focus of finance and growth literature is the way in which financial markets influence the main drivers of growth (such as investment and savings) and the fluctuations of business cycle indirectly, via their impact on the firms and consumers. Keynesians and post-Keynesians believe that aggregate demand is responsible for achieving full employment and economic equilibrium, and investment is placed at the centre stage to stimulate aggregate demand. Classical theorists favour equilibrium with equalised profit rates, process of production, and full utilisation of productive capacity. Accordingly, this chapter extensively discusses the post-Keynesian literature in investment and productivity analysis, and their approaches to macroeconomic modelling.

Cases, Studies, and Stylised Facts

An improved understanding of the financial market's performance will benefit researchers as it reveals the relationships between the financial systems and the real sector of the economy much further. In previous chapters, the authors identified both ends of the financial market structure spectrum (i.e. bank-based vs. market-based financial market). For example, in the countries with a bank-based financial system, as has been discussed in chapter three, banks may have closer ties with industries and investment projects. South Korea financial market is of this type. Nevertheless, countries with a market-based financial system may be more capable of providing liquidity and facilitating transactions, which is certainly the case in the United Kingdom.

Data, Preliminary Results, and Discussion 1

In this chapter, various data sources used are combined into one common database for this study. Methods of adjustments and generating suitable data frequency are discussed. The chapter also presents an overview of quantitative measures of indicators of financial development and other macroeconomic variables. The chapter in particular offers direction on key sector-wide indicators inducing definitions and measurements of these variables. As the pre-requisite of vector autoregression model and impulse response analysis, integer order of integration of all variables are checked. Cointegration is examined in the model, and causality, among variables, is verified later in the chapter.

Model and Model-Driven Methodology

This chapter specifies the empirical model used in the study, which is a Kaleckian post-Keynesian model, as an alternative to mainstream neoclassical theory. Having discussed the theory of financial intermediation in chapter two and commonality between post-Keynesian models of growth and endogenous growth theory in chapter three, this chapter postulates that financial development influences economic growth through different channels including investment, savings, and productivity growth. Later in the chapter, data characteristics, including stationarity, cointegration, and causality are reviewed. The chapter closes with a discussion about the main econometric modelling implemented in this research, including structural autoregressive modelling, impulse response analysis, and the variance decomposition method.

Survey of Recent Development in the Literature of Financial Market Development and Economic Growth

This chapter explores theoretical issues relevant to the history of finance in the literature. The chapter reviews primary research in the areas of economic growth and incorporation of the financial sector that led to the evolutionary process of financial liberalisation and the restructure of financial markets. Different strands of the theory and various schools of thought that (positively) link finance and growth since 1960s are reviewed. Characteristics and rationale behind these schools are debated. Later in the chapter, the theory of financial intermediation that emerged in the New Growth Theory of economic development is discussed and major types of financial market structures including bank-based financial markets and market-based financial markets are distinguished.