The Causal Relationship between Financial Development and Investment: a Review of Related Empirical Literature

• Authors: Brian Muyambiri , Nicholas M. Odhiambo

Title variants

Związek przyczynowy między rozwojem finansowym a inwestycjami: przegląd literatury empirycznej

• Languages of publication: EN

Abstracts

EN

This article reviews the theoretical and empirical literature on the causal relationship between financial development and investment. Based on the literature considered, it can be concluded that there is little consensus to date on the direction of causality between financial development and investment. The study concludes that most of the research done on the causal relationship between financial development and investment is highly skewed towards assessing the causal relationship between the bank‑based side of financial development, as compared to the market‑based side of financial development. Given the number of studies assessed, the causal relationship between financial development and investment appears to be inconclusive, at best. Moreover, the study shows that the relationship between these two macroeconomic variables seems to differ from country to country; it is dependent on the proxies used to measure the level of financial development, as well as the methodology employed.

PL

Artykuł zawiera przegląd literatury teoretycznej i empirycznej, dotyczącej związku przyczynowego między rozwojem finansowym a inwestycjami. W oparciu o rozważaną literaturę można stwierdzić, że jak dotychczas nie osiągnięto konsensusu w kwestii kierunku związku przyczynowego między rozwojem finansowym a inwestycjami. W artykule stwierdza się, że większość badań dotyczących związku przyczynowego między rozwojem finansowym a inwestycjami jest w większym stopniu ukierunkowana na związek przyczynowy między rozwojem finansowym opartym o banki niż o rynek, a inwestycjami. Z analizy opracowań można wyciągnąć wniosek, że związek przyczynowy między rozwojem finansowym a inwestycjami jest w najlepszym wypadku niejednoznaczny. Ponadto w artykule wskazano, że związek między tymi dwiema zmiennymi makroekonomicznymi wydaje się różnić w zależności od kraju; jest zależny od aproksymant używanych do pomiaru poziomu rozwoju finansowego, a także od zastosowanej metodologii.

Keywords

EN

Bank‑based financial development; Causality; Investment; Market‑based financial development

PL

rozwój finansowy oparty o banki; przyczynowość; inwestycje; rozwój finansowy oparty o rynek; rozwój finansowy oparty o banki; przyczynowość; inwestycje; rozwój finansowy oparty o rynek

• Publisher: Uniwersytet Łódzki. Wydawnictwo Uniwersytetu Łódzkiego
• Journal: Comparative Economic Research. Central and Eastern Europe
• Year: 2018
• Volume: 21
• Issue: 2
• Pages: 119-136

Dates

published

2018-10-02

Contributors

author

Brian Muyambiri

• Botswana Open University, Gaborone, Botswana

author

Nicholas M. Odhiambo

• University of South Africa, Pretoria, South Africa

References

• Ang, J. B. (2008), A survey of recent developments in the literature of finance and growth, ‘Journal of Economic Surveys’, Vol. 22, No. 3.
• Asongu, S. (2014), Linkages between investment flows and financial development: causality evidence from selected African countries, ‘African Journal of Economic and Management Studies’, Vol. 5, No. 3.
• Bagehot, W. (1873), Lombard street, 1962 edition, Richard D. Irwin, Homewood, IL.
• Boyd, J. H., and Prescott, E. C. (1986), Financial intermediary‑coalitions, ‘Journal of Economics Theory’, No. 38.
• Caporale, G. M., Howells, P., & Soliman, A. M. (2005), Endogenous growth models and stock market development: evidence from four countries, ‘Review of Development Economics’, Vol. 9, No. 2.
• Chaudhry, I. S. (2007), Financial liberalization and macroeconomic performance: empirical evidence from Pakistan, Available on http://www.gredeg.cnrs.fr/colloques/nfi/papers/PapierOnLine/Chaudry.pdf. Accessed 29 September 2015.
• Dawson, P. J. (2008), Financial development and economic growth in developing countries, ‘Progress in Development Studies’, No. 8.
• Hamdi, H., Hakimi, A., & Sbia, R. (2013), Multivariate Granger causality between financial development, investment and economic growth: evidence from Tunisia, ‘Journal of Quantitative Economics’, Vol. 11, No. 1 & 2.
• Hawkins, P. (2006), Financial access and financial stability, Online https://pdfs.semanticscholar.org/bcef/578a5779c73e5a201b209ccf52ccce6678db.pdf, Accessed 12 August 2016.
• Huang, Y. (2011), Private investment and financial development in a globalized world, ‘Empirical Economics’, Vol. 41, No. 1.
• King, R. G., and Levine, R. (1993), Finance and growth: Schumpeter might be right, ‘The Quarterly Journal Of Economics’.
• Levine, R. (1997), Financial development and economic growth: views and agenda, ‘Journal of Economic Literature’, No. 35.
• Lu, X., Fausten, D. K., and Smyth, R. (2007), Financial development, capital accumulation and productivity improvement: evidence from China, ‘Journal of Chinese Economic and Business Studies’, Vol. 5, No. 3.
• Majid, M. S.A. (2008), Does financial development matter for economic growth in Malaysia? an ARDL bound testing approach, ‘Journal of Economic Cooperation’, Vol. 29, No. 1.
• Marques, L. M., Fuinhas, J. A. & Marques, A. C., (2013), Does the stock market cause economic growth? Portuguese evidence of economic regime change, ‘Economic Modelling’, No. 32.
• McKinnon, Ronald I. (1973) Money and capital in economic development. Brookings Institute, Washington, DC.
• Muyambiri, B. and Odhiambo, N. M. (2017a), Financial development, savings and investment in South Africa: a dynamic causality test, ‘Global Economy Journal’, (published online Aheadof print 1 August). https://doi.org/10.1515/gej–2017–0042.
• Muyambiri, B. and Odhiambo, N. M. (2016), Financial development and investment dynamics in Mauritius: A trivariate Granger‑causality analysis, ‘UNISA Economic Research Working Paper Series’, WP15/2016. Available on http://uir.unisa.ac.za/bitstream/handle/10500/21161/UNISA%20Working%20Paper%2015%20Mauritius%20Causality.pdf?sequence=1. Accessed 12 August 2017.
• Muyambiri, B. and Odhiambo, N. M. (2017b), The causal relationship between financial development and investment in Botswana, ‘UNISA Economic Research Working Paper Series’, WP09/2017.Available on http://uir.unisa.ac.za/bitstream/handle/10500/22607/The%20casual%20relationship%20between%20financial%20development%20and%20investment%20in%20Botswana.pdf?sequence=1&isAllowed=y. Accessed 12 June 2017.
• Nazlioglu, S., Yalama, A., & Aslan, M. (2009), Financial development and investment: cointegration and causality analysis for the case of Turkey, ‘International Journal of Economic Perspectives’, Vol. 3, No. 2.
• Odhiambo, N. M. (2010), Finance‑investment‑growth nexus in South Africa: an ARDL‑bounds testing procedure, ‘Economic Change and Restructuring’, No. 43.
• Patrick, H. T. (1966), Financial development and economic growth in underdeveloped countries, ‘Economic development and Cultural change’, Vol. 14, No. 2.
• Robinson, J. (1952), The Rate of Interest, and Other Essays, Macmillan.
• Rousseau, P. L. (1999), Finance, investment, and growth in Meiji‑era Japan, ‘Japan and the World Economy’, Vol. 11, No. 2.
• Rousseau, P. L., & Vuthipadadorn, D. (2005), Finance, investment, and growth: time series evidence from 10 Asian economies, ‘Journal of Macroeconomics’, Vol. 27, No. 1.
• Shan, J. & Jianhong, Q. (2006), Does financial development lead ‘economic growth? the case of China, ‘Annals of Economics and Finance’, Vol. 7, No. 1.
• Shan, J. & Morris, A. (2002), Does financial development ‘lead’ economic growth? ‘International Review of Applied Economics’, Vol. 16, No. 2.
• Shan, J. Z., Morris, A. G. & Sun, F. (2001), Financial development and economic growth: an eggand‐chicken problem? ‘Review of international Economics’, Vol. 9, No. 3.
• Shaw, Edward S. (1973), Financial deepening in economic development. Oxford University Press, New York, NY.
• UNECA (United Nations Economic Commission for Africa) (2008), Theoretical Perspectives of Financial development and financial integration, [in:] Assessing Regional Integration in Africa (ARIAIII) – Towards Monetary and Financial Integration in Africa, United Nations Economic Commission for Africa, Addis Ababa, Available on www.mcli.co.za/mcli‑web/downloads/ARIA4/aria3/chap4.pdf. Accessed 12 August 2016.
• Xu, Z. (2000), Financial development, investment, and economic growth, ‘Economic Inquiry’, Vol. 38, No. 2.

Identifiers

DOI

10.2478/cer-2018-0015