Finance, growth and volatility

• Main Author: Law, Siong Hook
• Published: University of Leicester 2005
• Subjects: 338.9
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.416258

This dissertation makes three different contributions to the literature on financial development. Firstly, it examines the role of institutions in the relationship between finance and growth, using data from 72 countries during 1978 - 2001. The relationship between finance, institutions and growth is further analysed at four different stages of economic development. Secondly, it investigates empirically the hypothesis recently purposed by Rajan and Zingales (2003) that openness to trade and financial flows is one of the key determinants of financial development, using data from 43 developing countries during 1980 - 2000. Third, the dissertation examines the impact of financial market liberalisation on stock market volatility in the five East Asian emerging economies during pre- and post-financial liberalisation eras.;The empirical results indicate that both financial development and institutional quality have a positive significant impact on economic growth. Financial development has larger effects on growth when the financial system is embedded within a sound institutional framework. Both variables have the strongest positive impact on economic growth primarily in the upper middle-income economies. In the high-income and lower middle-income economies, financial development has a positive but smaller effect on growth compared to the upper middle-income economies, whereas institutions have a much more powerful impact on growth in the low-income economies.;With respect to the determinants of financial development, the empirical findings suggest that the combination of open product and capital markets promote greater financial development, even after controlling for real GDP per capita, real interest rate and institutional quality. This finding supports the Rajan and Zingales (2003) hypothesis -when the country's borders are open to both capital flows and trades, then it will deliver benefit to financial markets. The findings relate to all the indicators of financial development employed (both banking and capital market) and are robust to alternative measures of capital flows and trade openness, as well as estimation method and sample period.;Finally, the empirical evidence presented in this study suggests that stock market volatility has declined after financial liberalisation in the sample of East Asia emerging markets, but not in the case of Thailand. The endogenous structural break dates of stock market volatility, which are identified correspond closely to dates of official financial liberalisation reforms in these markets. The stock market volatility of these markets, however, becomes much higher during the 1997-98 East Asian financial crisis period.