South Africa Economy and Finance

Relationships of Economic and Financial Development

The first question that requires addressing is the question of growth relationships between economic growth and financial expansion. According to Stengos, Ketteni et al, "We find that, in contrast to recent research, the finance-growth relationship is linear when the previously documented nonlinearity between initial per capita income and human capital, on the one hand, and economic growth, on the other, is taken into account." They discovered that when these apparently non-linear elements are ignored, that the finance-economic growth appears non-linear. (Stengos, Ketteni, Mamuneas, & Savvides, 2004) This is at odds with other findings and indicates that these elements are relevant in the overall growth situation. They point out that the empirical evidence supports the contention that economic and financial growth are linked which is the intuitive answer to the question. Econometricians have raised questions concerning the linear properties of these growth assumptions.

King and Levine in a study that covers the 29 years from 1960 to 1989 constructed four measures of the level of financial development and related these to economic growth. Their conclusion was that there was a strong correlation between each of the measures and economic growth.

There are numerous other works that provide additional support for the proposition that there is a relationship between economic and financial growth such as Rioja and Va

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Category: Economics - S