Financial Development and Economic Growth: The Role of the Stock Markets

The relationship between financial markets and economic growth has interested
economists for decades. However, previous studies do not identify the unique role of
stock markets in economic growth, nor do they test explicitly if stock markets affect the
level or the growth rate of the economy. Several theoretical and empirical papers by
Levine (1991), Levine and Zervos (1995), Kunt (1992), and Kunt and Levine (1996) have
contributed to our understanding of how stock market development may affect
economic growth, but the common problem with them all is that no channel through
which stock markets can stimulate economic growth is explicitly identified.
This thesis deals with two issues concerning the relationship between stock markets
and economic growth. The study examines the nature of the causal link between stock
markets and economic growth using Toda and Yamamoto (1999) technique in testing for
causality relationship between the variables concerned. Focusing on the nature of
causality between stock markets and economic growth, the study examines the
endogenous growth hypothesis that fmancial markets enhance economic growth
performance specifically through the level and productivity of investment.
In the empirical part of the study, we analyze stock market data from seven countries
over 1979-1995. We use time-series analysis, and find that the development of stock
markets has a significant effect on the growth rate of real GDP. We also find evidence
that supports the endogenous growth hypothesis, where the level and productivity of
investment are important channels through which stock markets enhance economic
growth.

This thesis supplied via ROAR to UEL-registered users is protected by copyright and other intellectual property rights, and duplication of any part of the material is not permitted, except for your personal use for the purposes of non-commercial research and private study in electronic or print form. You must obtain permission from the copyright-holder for any other use. Electronic or print copies may not be offered, for sale or otherwise, to anyone. No quotation from the thesis may be published without proper acknowledgement.