Abstract:

The causal relationship between financial development and economic growth is expressed by different hypotheses. The demand pressure caused by economic growth and the increase in income levels can lead to the development of the financial system. This opinion is known as a follow-up hypothesis. On the contrary, the supply-pioneer hypothesis predicts that financial development leads to growth by providing an increase in efficiency in resource distribution. The re-nutrition hypothesis indicates that the causal relationship between financial development and growth is bilateral, while in the reflection hypothesis there is no causal relationship. In this study, the relationship between financial development and economic growth was studied in the example of the 34 OECD member countries. In the study, Dumitrescu and Hurlin (2012) panel causes analysis, which allowed addiction and heterogeneity between panel units, and the heterogeneous VAR model was predicted. Causability test results showed that there is a bilateral relationship between financial development and growth. The VAR forecast model has found the parameters of the delayed financial development variable for 11 countries meaningful. In the financial development VAR models, the rate of the growth variability is significant for 17 countries. These findings support the existence of the hypothesis of recovery in the financial development and economic growth relationships in the OECD countries.

Abstract:

The relationship between financial development and economic growth is expressed by different hypotheses. Demand pressure which is caused by increased income as a conclusion of growth may lead to the financial development. This argument is known as demand-following hypothesis. On the contrary, the supply-leading hypothesis indicates that financial development leads to increased efficiency and therefore promotes growth. The feedback hypothesis implies that the causal relationship between financial development and growth is bidirectional, whereas there is no causality in the neutral hypothesis. This study examines the relationship between financial development and economic growth in the case of 34 OECD countries. For this purpose we estimate heterogeneous VAR model and conduct Dumitrescu and Hurlin (2012) causality test which allows for dependency in panel units and heterogeneity of parameters. Findings of causality test showed that there is a bidirectional relationship. In VAR model that estimated for growth, parameters of lagged financial development were found to be significant for 11 countries. In financial development VAR model, lagged growth variable coefficients of 17 countries were significant. These findings support the feedback hypothesis for OECD countries in financial development and economic growth relationship.

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