Essays on financial development and economic growth

This thesis was submitted for the award of Doctor of Philosophy and was awarded by Brunel University LondonThis thesis is based on three empirical essays in financial development and economic growth. The first essay, investigated in the third chapter, the effect of financial development on economic growth in the context of Saudi Arabia, an oil-rich economy. In doing so, the study distinguishes between the effects of financial development on the oil and non-oil sectors of the economy. The Autoregressive Distributed Lag (ARDL) bounds test methodology is applied to yearly data over the period 1968 to 2010. The finding of this study is that financial development has a positive impact on the growth of the non-oil sector. In contrast, its impact on the oil-sector growth and total GDP growth is either negative or insignificant. This suggests that the relationship between financial development and growth may be fundamentally different in resource-dominated economies. The second essay revisited, in the fourth chapter, the relationship between financial development and economic growth in a panel of 52 middle-income countries over the 1980-2008 period. Using pooled mean group estimations in a dynamic heterogeneous panel setting, we show that there is an inverted U-shaped relationship between finance and growth in the long-run. In the short run, the relationship is insignificant. This suggests that too much finance can exert a negative influence on growth in middle-income countries. The finding of a non-monotonic effect of financial development on growth is confirmed by estimating a dynamic panel threshold model. The third essay empirically explores cross-country evidence of the effects of financial development shocks on economic growth. It employs a Global Vector Autoregressive (GVAR) model, which allows us to capture the dynamics of this relationship in a multi-country setting, and connects countries through bilateral international trade. Given the progressive role that Brazil, Russia, India, China and South Africa (BRICS) play in the world economic arena, this essay focuses on whether financial development in one BRICS member state affects economic growth in the other BRICS. To this end, the study finds empirical evidence that credit to the private sector has a positive spillover effect on growth in some of the BRICS countries. However, the results imply that the current level of financial integration among the BRICS countries is still not mature enough to spur economic growth for all the BRICS members.King Abdul Aziz Universit

Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia

© 2014 Elsevier B.V.We investigate the effect of financial development on economic growth in the context of Saudi Arabia, an oil-rich economy. In doing so, we distinguish between the effects of financial development on the oil and non-oil sectors of the economy. Using the Autoregressive Distributed Lag (ARDL) Bounds test technique, we find that financial development has a positive impact on the growth of the non-oil sector. In contrast, its impact on the oil-sector growth and total GDP growth is either negative or insignificant. This suggests that the relationship between financial development and growth may be fundamentally different in resource-dominated economies

Is the relationship between financial development and economic growth monotonic? evidence from a sample of middle income countries

We revisit the relationship between financial development and economic growth in a panel of 52 middle-income countries over the 1980-2008 period. Using pooled mean group estimations in a dynamic heterogeneous panel setting, we show that there is an inverted U-shaped relationship between finance and growth in the long-run. In the short run, the relationship is insignificant. This suggests that too much finance can exert a negative influence on growth in middle-income countries. The finding of a non-monotonic effect of financial development on growth is confirmed by estimating a threshold model

Short- and long-term growth effects of special interest groups in the U.S. states: A dynamic panel error-correction approach

The perception of special interest groups as a serious threat to economic growth has strengthened over the years; however, the vast empirical literature surrounding this claim has produced mixed and inconclusive results. This study re-examines the issue incorporating a potentially important aspect that has generally been ignored by previous studies, namely, the implicit suggestion by some of the theoretical works that the extent and the intensity of the growth effects of special interest groups may differ significantly over different time frames. Specifically, this study uses dynamic panel error-correction methods (Pesaran, Shin, and Smith (1999)) to properly determine whether these effects, if they exist, occur mostly in the short run or the long run based on data from a panel of 48 U.S. states for the years 1975 – 2004. The joint Hausman-type test selected the preferred model, which controls for human capital achievement, initial income, income inequality, and the tax burden. This model produced results which are in sharp contrast to the simple linearly negative or positive findings reported in much of the literature by indicating that special interest groups have significant non-linearly inverted U-shaped long-run effects on growth, and that it takes time (about 8 years) for the full effects to become evident. The results provide evidence that U.S. states face a threshold point below which special interest groups’ lobbying and rent-seeking activities boost long-run growth performance but above which they have damaging effects on long-run growth effort. This is confirmed by the Lind and Mehlum (2010) u-test which also suggests that the threshold point is reached when the activities and strength of special interest groups (measured by the percentage of each state’s public and private non-agricultural wage and salary employees who are union members, and which varies from 3.8% to 38.7%)) is at the 15.8% level

Oil Price Shocks to Foreign Assets and Liabilities in Saudi Arabia under Pegged Exchange Rate

The Saudi economy ought to maintain a significant amount of foreign exchange reserves due to the pegged exchange rate regime. As a hydrocarbon economy, we measure the dynamic response of external assets and liabilities of banks to the international oil price in Saudi Arabia. In the presence of extreme observations, we apply sophisticated frameworks, including cross-quantilograms, quantile-on-quantile and TVP-VAR approaches, to analyze weekly time-series data from 1993 to 2021. Our results from the cross-quantilogram and quantile-on-quantile frameworks demonstrate that foreign assets and liabilities responded asymmetrically to the volatilities of international oil prices under the bullish and bearish states of the market over different memories. The TVP-VAR results indicate that, during the COVID-19 pandemic, the Saudi economy encountered negative net foreign assets, which occurred mainly as a significant plague of international oil prices. Our findings are robust under different estimators

Oil Price Shocks to Foreign Assets and Liabilities in Saudi Arabia under Pegged Exchange Rate

The Saudi economy ought to maintain a significant amount of foreign exchange reserves due to the pegged exchange rate regime. As a hydrocarbon economy, we measure the dynamic response of external assets and liabilities of banks to the international oil price in Saudi Arabia. In the presence of extreme observations, we apply sophisticated frameworks, including cross-quantilograms, quantile-on-quantile and TVP-VAR approaches, to analyze weekly time-series data from 1993 to 2021. Our results from the cross-quantilogram and quantile-on-quantile frameworks demonstrate that foreign assets and liabilities responded asymmetrically to the volatilities of international oil prices under the bullish and bearish states of the market over different memories. The TVP-VAR results indicate that, during the COVID-19 pandemic, the Saudi economy encountered negative net foreign assets, which occurred mainly as a significant plague of international oil prices. Our findings are robust under different estimators

The finance-growth nexus: Which factors can interfere?

The financial sector's role in economic growth is heavily contested by economists. Some argue that economic growth is not caused by finance, but that it responds to changing demands, while others argue the positive effect of finance on economic growth (Robinson, 1952; Miller, 1998). Many researchers have concluded that ignoring the notion of the finance-growth link only restricts understanding of economic growth (Bagehot, 1873; Schumpeter, 1912; McKinnon, 1973).Scopu

Innovation and credit market deepening: Evidence from Russian region

We investigate the impact of credit market deepening on innovation, considering the role of investment risk and investment potential in the context of Russian regions, analysing the panel time series data extracted from the Federal Statistics Department of the Russian Federation and using the method of moments quantile regression. Our baseline findings demonstrate that credit market development spurs innovation in the sample regions in all quantiles (q10–q90), and the credit market has a positive impact on innovation, regardless of whether investment risk is lower or higher. In addition, we reveal a U-shaped relationship between innovation and regional economic growth in Russian regions. We also observe reductions in imports and exports and a boosting effect of increased employment on innovation. We propose several potential policy measures and practical conclusions based on our findings

Tail Dependence and Risk Spillover from the US to GCC Banking Sectors

This study investigates the structure of the tail dependence between the United States (US) and Gulf Cooperation Council (GCC) banking sectors for the period February 2010 to July 2017. Conditional value at risk and conditional diversification benefits are calculated. The GCC banking sectors show lower tail dependence with the US banking sector. This is confirmed by the fact that GCC banking sectors receive higher downside risk spillover from the US banking system during downside market movements compared to upside risk spillover effects. Interestingly, an equally weighted portfolio of US and GCC banking stocks can provide relatively higher diversification benefits. These findings have implications for portfolio diversification, asset allocation and hedging strategies